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By XE Market Analysis January 3, 2014 3:00 am
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    XE Market Analysis: Europe - Jan 03, 2014

    A yen rally has been the main theme today in improved liquidity with the Hong Kong and Singapore centres reopening today, though Tokyo remained closed. USD-JPY made a 10-day low of 104.07, down from yesterday's London close of 105.01. EUR-JPY also fell to a 10-day low to 142.09, adding to the euro-driven losses of yesterday from the upper 144s. The yen's bid was consistent with its usual inverse correlation with stock market performance, with Asia markets trading lower for a second consecutive day (the MSCI Asia Pacific ex-Japan index was showing a 1% loss). Stop selling in still-thin conditions magnified movement. EUR-USD, in contrast, consolidated yesterday's drop from the mid-1.37s around the 1.3650 level. The only data of noted was China's December services PMI, which came in sub-forecasts at 54.6, down from 56.0 prior. AUD-USD managed to pop its head above recent consolidation highs to log a three-week high of 0.8993. There didn't appear to be any news or data development driving the Aussie, and it rose despite weaker stocks and the China data disappointment. AUD-USD had technically been losing downside momentum.

    [EUR, USD]
    EUR-JPY also fell to a 10-day low to 142.09, adding to the euro-driven losses of yesterday from the upper 144s. EUR-USD, in contrast, consolidated yesterday's drop from the mid-1.37s around the 1.3650 level. We continue to expect further downside in EUR-USD on a dollar bullish view in light of a run of mostly firm U.S. data and in the wake of the Fed QE tapering decision. The bigger picture has been one of a flatting trend, with implied risks of a sustained correction. The repeated failures to hold gains above 1.3800 over the last two months was reflective of this. We target 1.3600.

    [USD, JPY]
    The yen rallied across-the-board today during Asia trade amid improved liquidity with the Hong Kong and Singapore centres reopening today, though Tokyo remained closed. USD-JPY made a 10-day low of 104.07, down from yesterday's London close of 105.01. EUR-JPY also fell to a 10-day low to 142.09, adding to the euro-driven losses of yesterday from the upper 144s. The yen's bid was consistent with its usual inverse correlation with stock market performance, with Asia markets trading lower for a second consecutive day (the MSCI Asia Pacific ex-Japan index was showing a 1% loss). Stop selling in still-thin conditions magnified movement. USD-JPY support is marked at 104.00-104.05, which encompasses the present level of a two-month trend support line. Strong support is marked at 103.40.

    [GBP, USD]
    Sterling has corrected lower amid rebounds in both the dollar and yen. Until recently the pound was being supported by differentials, with U.K. yields rising quicker than other G7 yields following a run of impressive U.K. data. Yesterday's unexpected dip in the manufacturing PMI provided a speed bump, though it doesn't change the overall positive outlook for the U.K. economy. Overall, forward looking survey evidence, such as PMI order data and CBI industrial trends, along with recent lending figures and house prices data, are collectively pointing to continued robust economic expansion. There are caveats, and the main issue for U.K. policymakers is that recovery has been too much driven by rising consumption and household debt and not enough by capital investment and export success. Despite such concerns, we expect sterling to continue trending higher during the early part of 2014.

    [USD, CHF]
    The CHF has remained on a weaker footing. USD-CHF has scaled back above 0.9000 and EUR-CHF breached above 1.2300 yesterday for the first time in a month, up from its pre-Fed tapering decision low of 1.2166, which was the lowest level seen in eight months. This reflects an unwinding in the Swiss currency's safe haven premium as the period of Fed policy uncertainty ended with its decision to commence QE tapering. Resistance comes in at 1.2320, support at 1.2250 and 1.2220.

    [USD, CAD]
    USD-CAD has seen some pretty choppy price action over the last coupled of weeks, spiking to a major-trend peak of 1.0737 on Dec-20, subsequently diving to sub-1.06 levels before recovering the 1.0700 level once again. Bigger picture, the pair has been looking stretched technically, with prevailing levels having deviated above the 200-day moving average by a comparatively wide margin by historical standards (the average is presently situated at 1.0440). This conviction may have been strengthened by the repeated rejections from levels above 1.0700 over the last three weeks, and we may see a period of price stasis or a deeper correction over the coming weeks. Support is suggested by the Dec-12 low of 1.0561 and the 1.0550 level, between which are encompassed a multiple of former daily lows and daily highs that were recorded over the last six-months.

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