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By XE Market Analysis October 23, 2013 6:29 am
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    XE Market Analysis: North America - Oct 23, 2013

    European markets were dominated by risk aversion after Asia experienced an afternoon move out of speculative positions after a Bloomberg story highlighted a rise in China bad loans. Investors in the region were also a concerned over a tightening in China liquidity conditions, which triggered the downturn in equity markets. JPY rallied sharply in Asia, but in Europe movement was contained by USD-JPY support into the 200-dma at 97.28. CHF played catch up on U.S. fund liquidation via GBP-CHF, which fed a downturn in Cable, although a standout order in GBP 1.5 bln reportedly weighed significantly. The BoE minutes did not break any new ground, but it did play down the likelihood of inflation breaching the 2.5% knockout due to the recent rise in sterling. EUR-USD was resilient as Asian reserve recycle and EUR-GBP strength absorbed EUR-JPY and EUR-CHF supply.

    [EUR, USD]
    EUR-USD has been resilient so far despite risk reduction. EUR-JPY and EUR-CHF supply has only had a mild influence on EUR-USD. This is due to persistent Asian sovereign demand on dips following intervention in local currencies. Recycling of dollar reserves absorbed a EUR-USD downturn from 1.3790 to 1.3745. Bias for EUR-USD is still skewed to higher levels following yesterday's break through key long-term resistance at 1.3710 and 1.3739, which came after the U.S. NFP data from September.

    [USD, JPY]
    USD-JPY ran into buyers from 97.30 following the sharp downturn from 98.20 in Asia. It was mostly fast money that got stopped out as the JPY-crosses plunged on China concerns. A rise in bad loans raised default risk, while tighter liquidity conditions in China also weighed. USD-JPY stabilised once the 200-dma at 97.28 printed. However, upward momentum is still being compromised by risk aversion. The underlying dollar is also weak after yesterday's U.S. NFP data reinforced expectations that the Fed will stay on hold until the end of Q1 2014. Intra-day accounts are likely to sell USD-JPY on strength, with close-to-market offers just over 97.50 and larger from 97.70-80. Note, there are still large expiries due to roll off between 98.00 and 98.50, along with smaller interest at 97.50.

    [GBP, USD]
    GBP ended the European morning at moderately weaker levels following very heavy long liquidation ahead of the BoE MPC minutes. One large U.S. name reportedly sold GBP 1.5 bln, while there was good U.S. fund supply via GBP-CHF and heavy unwinding by GBP-JPY longs by fast money accounts in Asia. This led to a Cable fall from just over 1.6250 to 1.6145 before the BoE and EUR-GBP cleared 0.8510 for the first time since early September. The BoE minutes revealed a 9-0 vote for unchanged policy, which was as expected. Overall, the minutes were broadly balanced. It did note, however, that the CPI knockout laid out in its forward guidance strategy, was safe as the sterling rise in the last two months reduced inflationary headwinds. Cable edged out 1.6137 lows, while EUR-GBP stalled ahead of the 200-dma at 0.8534.

    [USD, CHF]
    CHF benefited on risk reduction. GBP-CHF was the standout cross trade since the London open. It fell from 1.4520 to 1.4440 and triggered follow through selling in EUR-CHF from 1.2335 to 1.2305. USD-CHF is still trading on the heavy side after it registered a negative close near 0.8950 on Tuesday after the dollar sank on the Fed policy outlook amid a disappointing September U.S. NFP reading, which came ahead of the October government shutdown. Previously, funds had been reluctant USD-CHF sellers due to the semi-official support, which fuelled a strong Swiss bid. However, the definitive dollar breakdown has kept the downside bias intact and also threatens to force EUR-CHF back on a 1.22 handle.

    [USD, CAD]
    USD-CAD rallied from late Asia over the course of the Europe morning. Risk appetite evaporated in Asia on China default fears and tighter liquidity conditions, which weighed on European markets and the commodity bloc currencies. USD-CAD rallied out of 1.0280 and hit 1.0338 intra-day highs. There is a feeling in the London market that movement may have been exacerbated by market positioning as shorts got caught offside under 1.0300 again after failure to break heavy bids between 1.0270 and 1.0250.

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