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By XE Market Analysis May 16, 2014 7:03 am
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    XE Market Analysis: North America - May 16, 2014

    EUR-USD was knocked back below 1.3700 after giving a weak rebound in early London trade, which saw the euro stall at 13727, five pips shy of yesterday's peak. Price action remains clearly bearish. Yesterday's three-month low at 1.3648 is back in scope, though interbank and short-term speculative participants will be trending careful due to the risk of a pre-weekend short squeeze following a bearish week. Cable stalled into yesterday's high at 1.6806 after nudging slightly higher. USD-JPY saw less than a 20 pip range during the European AM. Declines in European and Asia equity markets, led by a steep 1.7% dive in Japan's Nikkei, didn't stir the forex market. News that China's bad loans rose the most since 2005 weighed on equity market sentiment, while the Japanese stock market was perturbed by yesterday's rise in the yen to a two-month high versus the dollar.

    [EUR, USD]
    EUR-USD price remains distinctly bearish, with there being a lack of substantive rebounds in the wake of ECB-initiated decline that commenced last Thursday, with lower lows continuing to be seen. We concur with a UBS research note of earlier in the week, which argued that EUR-USD will fall to sub-1.3400 levels over the coming weeks based on forecasts for May Eurozone CPI and the May U.S. payrolls report, along with ECB action at its June policy meeting.

    [USD, JPY]
    USD-JPY held steady during the Asian and European AM sessions, ranging between 101.42 and 101.64, holding above yesterday's two-month low at 101.31. The yen's rise yesterday was seen during the London PM session on the back of a rise in risk aversion, this time emanating out of the Eurozone periphery (amid concerns about retroactive taxes on bond holders and signs that the Greek governing coalition is losing support). The yen's gains perturbed Japanese stock markets today, and the Nikkei dove 1.7% . Bigger picture, USD-JPY still remains entrenched amid a broad sideways range, roughly contained within 100.00-105.00, which has been in place since early January. This stasis may persist for some time, though technical analysts will be marking this as a potential topping formation after the steep rally from levels around 75.0 that was seen during the second part of last year.

    [GBP, USD]
    Wednesday's disappointing labour market report and more especially the BoE May Inflation Report, which unexpectedly left GDP and CPI projections largely unchanged while signalling that there remains no rush to hike interest rates, were game changes for sterling. The market had clearly got ahead of itself with regard to BoE tightening expectations. While the labour report wasn't exactly bad, with unemployment dipping to a new cycle low of 6.8% from 6.9%, the claimant data pointed to a slackening in the pace of decline while average income data unexpected dipped to 1.3% y/y, below CPI inflation, which is 1.6%. This backs up BoE arguments that there remains a good degree of slack in the economy. We look for Cable to revisit 1.6700 and below, though we don't anticipate too much potential for sustained losses below 1.6500.

    [USD, CHF]
    EUR-CHF traded marginally lower, to the 1.2210-15 region, as the Swiss currency found safe haven demand. EUR-CHF recently recovered from a recent foray to the mid-121s. The cycle low of 1.2104 and 1.2100 are key support levels. The threat of SNB intervention into its 1.2000 limit peg is helping to deter franc buying to some extent. SNB's Jordan repeated recently that the central bank remains committed to defending the currency cap.

    [USD, CAD]
    USD-CAD firmed back toward 1.0900. The pair has throughout the week managed to remain above the 1.0812 low that was seen last Friday. The pair has been in a correction/consolidation phase since late January following a four-month rally period from sub-0.9700 levels, but a moderate bear trend seems to be emerging. The still-dovish outlook for BoC policy, however, seems to be putting a limit on the CAD's upside. We expect a choppy, sideways bias in USD-CAD.

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