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By XE Market Analysis January 21, 2014 3:02 am
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    XE Market Analysis: Europe - Jan 21, 2014

    The JPY underperformed and the AUD outperformed amid a risk-on sentiment in broader asset markets in Asia today in reaction to news that PBoC injected liquidity into the interbank lending market today. USD-JPY rallied about 50 pips to a peak of 104.69 as the yen weakened across-the-board, as is its usual bias during risk-on phases. EUR-JPY saw a similar price action in rising to 141.83. The BoJ also started a regular two-day policy meeting today, which should at the least yield a reaffirmation of its expansive policy tomorrow. AUD-USD, meanwhile, reacted it positively to the data, rallying to a five-day peak of 0.8837. Stocks in Asia rallied amid this backdrop. Into the mix was WSJ Fedwatcher Hilsenrath, who argued that Fed is set to announcement a further tapering in QE asset purchases at the Jan-29 FOMC, to $65 bln a month from the current $75 bln, as the soft December jobs report has not diminished the Fed's expectations for solid U.S. economic growth this year. That news saw EUR-USD sink to sub-1.3550 levels.

    [EUR, USD]
    We continue to expect EUR-USD to trend lower, even though EUR-JPY may well advance as we anticipate more yen underperformance. The market is amid a reassessment of the ECB policy amid its battle against disinflation (and to decouple interest rate expectations in the Eurozone from the U.S. as the Fed starts policy tapering), with member Coere signalling last Friday, for instance, that negative deposit rate remains an option. In contrast, the U.S. Fed may well announce a further tapering in its QE asset purchase schedule at the late January FOMC (WSJ Fedwatcher Hilsenrath argued a reduction to $65 bln a month from the current $75 bln is on the cards). EUR-USD resistance at 1.3580-1.3600, support is at 1.3500.

    [USD, JPY]
    The JPY underperformed amid a risk-on sentiment in broader asset markets in Asia today in reaction to news that PBoC injected liquidity into the interbank lending market today. USD-JPY rallied about 50 pips to a peak of 104.69 as the yen weakened across-the-board, as is its usual bias during risk-on phases. EUR-JPY saw a similar price action in rising to 141.83. The BoJ also started a regular two-day policy meeting today, which should at the least yield a reaffirmation of its expansive policy tomorrow. We continue to expect that USD-JPY's major-trend peak at 105.44 to fall as the BoJ's expansive monetary policy should continue to drive the yen to fresh lows during 2014. Data this month showed Japan's monetary base surged 46.6% y/y in December to a record Y193.5 tln, illustrating the impact that the BoJ's reflationary policy is having. The BoJ is targeting a monetary base to Y270 tln by the end of the year.

    [GBP, USD]
    Sterling received a short in the arm following last Friday's release of much stronger than expected retail sales data for December. However, the overall outlook is still looking generally less bullish following CPI figures that showed inflationary pressures to be rapidly unwinding and real sector data and survey evidence that have shown that the economy hasn't been sustaining recovery momentum as well has had been thought. The data backdrop supports the BoE's ultra-easy policy stance. We still expect the pound to hold up against the likes of the yen, but to loose ground to the dollar. GBP-USD's six-month rally now looks to have capped out and we see scope for a correction to 1.6000. Initial resistance is marked at 1.6450-55.

    [USD, CHF]
    The CHF has seen some choppy price action in recent sessions, but overall we expect the currency to remain on a bigger-picture softer footing as a consequence of the 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 1.2400, support at 1.2320 and 1.2300.

    [USD, CAD]
    USD-CAD has broken sharply higher over the last week, partly driven by weaker Canadian data and the consequent underpinning of favourable yield differential movement. The pair broke 1.0700, 1.0800 and now 1.0900, taking out its Dec-20 major trend peak of 1.7337 on route. The price action marks a break higher after some pretty choppy price action over the last several of weeks. Resistance can now be expected at 1.1000, support at 1.0920-1.0900.

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