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By XE Market Analysis October 17, 2013 6:26 am
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    XE Market Analysis: North America - Oct 17, 2013

    There was a mild relief rally in risk assets overnight after the U.S. Senate and House passed the budget deal, which will extend the debt ceiling till early February and reopen the government till the middle of January. However, the move ran its course as market participants looked ahead to more potentially fractious negotiations early next year, while many suspect that it could push back Fed policy tapering even further. The dollar was sold heavily out of Europe, which lifted EUR from 1.3550 to 1.3640 and USD-JPY turned away from 99.00 in Asia and traded at 97.80 in Europe. Cable legged higher to clear 1.6050 and extended through 1.6090 on better than expected U.K. retail sales data. The Eurozone current account surplus widened, while investment flows remained EUR positive. There was strong demand at today's Spanish bond auction, which weighed on refinancing costs, and the French auctions also saw good demand.

    [EUR, USD]
    EUR-USD raced up from 1.3550 to 1.3640 in Europe on heavy fund demand. Dollar selling accelerated after the U.S. reached a deal to reopen the government and extend the debt ceiling to early next year. The short term deal offered mild relief to the market, but also reduces the likelihood of Fed policy tapering. The outlook for Fed policy was already pushed back after the prolonged government shutdown postponed a series of key economic data releases. There are growing expectations that Fed could be on hold for the remainder of Fed Chairman Bernanke's tenure. The dollar fell with U.S. yields, while yesterday's EUR-USD hold above 1.3450-60 support also points to higher levels. Option defensive sellers emerged ahead of 1.3650, which is the top of the 1.3450:1.3650 range binary position.

    [USD, JPY]
    USD-JPY longs bailed after hourly support gave way between 98.40 and 98.30. Short term accounts got caught long overnight after 99.00 held amid heavy exporter offers and gamma related selling. European accounts were net sellers of USD-JPY after it started the session under 98.50 and the weight of dollar selling has tipped it to 97.80. Japanese importer bids stood in the way of another round of sell stops below October-10 lows at 97.60. Japanese PM Abe made comments that suggested the government is open to more stimulus measures next year if needed, but there was no impact on the JPY, with broad USD losses the leading trade in Europe.

    [GBP, USD]
    GBP got a fillip from U.K. retail sales data. A better than expected reading triggered a EUR-GBP move into 0.8475 versus intra-day highs around 0.8495. Cable firmed up from 1.6060 to 1.6090 on the release, but had already recorded very strong gains amid broad based dollar selling. Cable rallied nearly a full big figure from 1.5975 at the European open. Very choppy action was noted ahead of the U.S. debt deal on Wednesday, which triggered a stop hunt from 1.6000 to 1.5895, but very prominent demand fuelled a move back over 1.5950. The dollar looks poised for a period of underperformance and positive U.K. fundamentals should see sterling as one of the major beneficiaries.

    [USD, CHF]
    CHF firmed up as deep USD-CHF losses weighed on EUR-CHF. The dollar pairing topped out around 0.9150 in Asia and fell sharply in Europe from 0.9120 to 0.9040. EUR-CHF spent the overnight session just above 1.2350 and was dragged down to 1.2325 amid USD flows. Equity markets in Europe posted modest losses and Asian markets were mixed. Japan pushed higher, along with Australia, but markets in Hong Kong and China closed at weaker levels. China's rating agency Dagong downgraded the U.S. sovereign rating from A to A- and maintained a negative outlook as the "government is still approaching the verge of default crisis".

    [USD, CAD]
    USD-CAD extended losses and traded into the 1.0290 area. The dollar came under pressure over yesterday's N.Y. afternoon. In Asia, there was a period of two-way chop as market participants digest the short term U.S. debt deal. However, over the Asia afternoon and early Europe funds were very heavy dollar sellers as U.S. yields tumbled and this triggered a USD-CAD fall from 1.0320. Macro funds are positioning for further dollar losses and this could tip USD-CAD back towards near-term support between 1.0270 and 1.0250.

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