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By XE Market Analysis October 2, 2013 6:38 am
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    XE Market Analysis: North America - Oct 02, 2013

    The dollar was narrowly mixed in quiet European trade. In Asia, it edged higher against EUR, GBP and CHF, but there was a lack of follow through as the U.S. government shutdown left a fragile tone and European accounts sold into strength. It is widely thought that the shutdown has effectively eliminated any risk of an October Fed policy change. However, there is hope in some circles that it could galvanise negotiations in order to avoid going over the fiscal cliff. The main movers in Europe were USD-JPY and Cable. The former was subjected to a stop hunt in early trade under 97.50 on deleveraging amid a weak Nikkei close. Cable benefited on Asian sovereign demand and fund inflows despite a weaker than expected U.K. construction PMI reading.

    [EUR, USD]
    EUR-USD traded a tight range, though was supported on dips as the U.S. government shutdown left the USD on a fragile footing. Ahead of the ECB policy outcome there was limited flow in either direction. Yesterday's pullback from the 1.3590 area left the immediate bias on the downside, though very strong bids put a floor in place ahead of 1.3500. Since the EUR broke higher after the Fed policy decision in September the underlying trend is skewed to a move on 2013 highs just above 1.3700. There are bids at 1.3510 to 1.3490, while good chart support is seen at 1.3450-60. We expect the ECB today to maintain the easing bias and market participants will scrutinise comments that relate to another potential LTRO.

    [USD, JPY]
    USD-JPY support gave way at 97.50 as Europe headed to JPY after it posted the biggest footprint in Asia. The Nikkei closed more than 2% lower, which triggered a run on stops through 97.50. Large bids at 97.50 gave way fairly easily amid selling from mainland Europe and losses extended to 97.30. Japanese banks are holding stop losses between 97.30 and 97.20, though talk of institutional investor demand near 97.30 and retail account bids at 97.00 should slow the downturn, along with large 97.00 option expiries. Today's downturn reinforces USD-JPY's bearish credentials and an extended move through support at 96.80 would see accelerate losses. However, the risk for dollar shorts is progress on the U.S. debt ceiling and a pick up in BoJ policy rhetoric after PM Abe announced yesterday's sales tax hike, which is due to take effect from next April.

    [GBP, USD]
    Cable reached intra-day highs over 1.6200 ahead of today's U.K. construction PMI data. Good support at 1.6160 to 1.6130 put a floor in place, while an active Asian central bank was a decent buyer and lifted Cable to 1.6210. U.K. data was slightly disappointing and eased to 58.9 from 59.1 previously, which was below expectations. However, it is still in expansionary territory and given recent U.K. data releases it should not have any impact on the underlying sterling trend. The run of stronger than expected U.K. data saw BoE Governor Carney close to door on further stimulus recently, which guided sterling higher, though the pace of the upturn fueled consolidation today, leaving Cable off yesterday's 1.6261 peak. Cable is trading very close to large option expiries at 1.6200. Meanwhile, EUR-GBP is steady near 0.8350 after it met a strong corporate bid ahead of 0.8330 yesterday, which is a key area for hedging.

    [USD, CHF]
    EUR-CHF is stable around 1.2250 after it found support ahead of 1.2200 on Tuesday, and managed a run up toward 1.2270 in N.Y. Risk appetite perversely returned after the U.S. government shut down, resulting in higher stocks, and a firmer dollar. The thinking in the market is that a government shutdown will accelerate negotiations to avoid going over the U.S. fiscal cliff. USD-CHF has also stabilised over 0.9050 after it found a strong bid under 0.9000 on during Tuesday's London morning.

    [USD, CAD]
    USD-CAD edged up through 1.0350 after it found good support ahead of the 1.0300 mark during Tuesday's N.Y. session. Persistent oil price weakness, and the slide in gold prices didn't help the CAD. However, stock markets have stabilised and this could limit the USD-CAD upside, along with good standing offers from 1.0375 to 1.0400.

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