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By XE Market Analysis October 18, 2013 6:48 am
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    XE Market Analysis: North America - Oct 18, 2013

    The dollar was still pegged back following Thursday's deep losses after Congress extended the debt limit. In addition, bearish sentiment was reinforced by expectations that the recent political wrangling could delay further the Fed's willingness to taper. Some bank research desks predicted that the U.S. government shutdown may cut up to 0.5% from U.S. Q4 GDP. EUR moved over 1.3700 and Cable cleared 1.6200. Meanwhile, JPY and CHF were also pressured by a rise in risk appetite after a positive set of monthly releases from China, and included a Q3 GDP reading of 7.8%. This enabled AUD to add to recent gains and it moved through option barrier exposure at 0.9650.

    [EUR, USD]
    EUR-USD extinguished option barriers at 1.3700 on further dollar weakness. Some of the EUR demand was pinned on Asian central bank reserve diversification as underlying dollar weakness triggered smoothing activity in local currencies. The 1.3710 level is a key long term resistance levels from previous topside failures stretching over quite a number of years, while above 1.3710 there is also March 2009 highs at 1.3739, as well as further option barriers exposure. We are not ruling out further EUR gains, but movement could be very slow and other currencies may outperform the EUR after this week's broad rally. For example, EUR-GBP could drift lower and EUR-AUD may come back under pressure.

    [USD, JPY]
    USD-JPY extended losses as dollar selling picked up in Europe. Movement may be fairly slow through due to good size option expiries at 98.00, 98.30 and 98.50, along with outstanding exposure at 97.50 and 97.00. Thick Japanese bids were noted on the way down between 97.80 and 97.50. A break below 97.50 would embolden dollar sellers. However, today's option maturities should also encourage gamma trading on dips. Both BoJ Governor Kuroda and BoJ board member Iwata said the BoJ will continue with QE for as long as needed in order to meet its two-year price target. These comments did not break any new ground and recent policy remarks from both Japanese government officials and the BoJ are not having any impact currently.

    [GBP, USD]
    Cable traded above 1.6200 on bullish momentum and USD weakness. London names were early buyers out of 1.6150 to 1.6195, where an overhang of offers have temporarily capped further gains. Cable churned from 1.6060 to 1.5895 ahead of the U.S. debt deal and then pushed higher after the deal was formally passed in the early hours on Thursday. GBP strength has been compounded by more U.K. data strength. The job market is improving, which is helping consumer spending, though stagnant real incomes are still a problem and could hamper the outlook. GBP has traded higher against funding currencies like JPY and CHF, while against the EUR it also edged up in the last 24 hours on corporate hedging. The supportive cross-flows should reinforce the underlying tone, which is pointing to a retest of October-1 trend highs at 1.6260.

    [USD, CHF]
    EUR-CHF was underpinned on dips after it held on to the 1.23 handle during Thursday's session. EUR-USD's bid tone and very good support from local names lifted the cross out of 1.2310 back to 1.2350, though momentum was limited by USD-CHF heaviness just in front of 0.9000. Equity markets remain positive, but we still think markets will maintain an element of caution ahead of key U.S. data releases, which were postponed over the course of the government shutdown. These will kick off next week, with nonfarm payroll data for September due to released on Tuesday, according to the BLS. What is clear though is that Fed taper has been pushed back further and this will limit the dollar upside in the near-term. USD-CHF offers start from 0.9060 and are now fairly heavy across the 0.9100 zone.

    [USD, CAD]
    USD-CAD remain on the 1.02 handle after it broke lower on Thursday. There was a minor attempt on higher levels in Asia, but offers from 1.0300 capped and it remained heavy throughout the European morning as dollar weakness persisted. Prices drifted towards 1.0280 ahead of very good support into the 1.0270 level. Bids are anticipated all the way down to 1.0250, where large stops are reported. The temporary fix in Washington helped risk and CAD sentiment overall, though a lack of movement through 1.0270 could prompt some near-term short covering.

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