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By XE Market Analysis November 18, 2013 3:07 am
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    XE Market Analysis: Europe - Nov 18, 2013

    The dollar consolidated in Asia. The EUR was slightly firmer intra-day, leaving it near 1.3500 as last week's dovish Yellen remarks continue to reverberate, while USD-JPY backed away from over 100.00 as Japanese corporate flows picked up. The market welcomed China's ground breaking reforms, which covered 60 different points and included an end to the one-child policy. IPOs will now be put in the hands of the market rather than government and it also planned to speed up the process of interest rate liberalisation. Meanwhile, the Japanese press suggested that the government will compile the second part of its growth strategy next June, which could coincide with more BoJ stimulus after the planned April sales tax hike comes into effect. The European press highlighted comments from ECB's Praet, which echoed last week's dovish remarks, but ECB's Coene did not think it should cut interest rates further.

    [EUR, USD]
    EUR-USD found buyers on dips, with an underlying bid in EUR-JPY, while last week's dollar selling still underpinned near-term sentiment. The bias from short term indicators and the daily chart is still with the topside and this encouraged buyers. There was no impact from ECB comments that were highlighted in the weekend press, which did not represent a new stance. It is notable that EUR has not managed to sustain lower levels even with the ECB's shift. There is still conjecture that EUR could be supported into the year-end on repatriation flows as banks contend with next year's stress test. Corporate hedging and option flows have also been a feature on the downside since the ECB cut rates.

    [USD, JPY]
    USD-JPY and the JPY crosses reflected the tone in Japanese equity markets, which struggled around flat as the emphasis shifted to profit taking after last week's outsized gains. The dollar pairing backed away from 100.40 early on amid an overhang of option structures and corporate hedging. As the pair drifted lower macro funds also added supply, but downside progress was limited into 100.00 by Japanese importer demand and option flows ahead of today's 100.00 expiries.

    [GBP, USD]
    GBP has remained well supported following last week's strong U.K. labor market data and upwardly revised BoE forecasts of U.K. GDP, which were announced in the release of the BoE Inflation Report. Markets are bringing forward the expectation for the eventual raising of the repo rate from its prevailing record low of 0.5% (in place since March 2009). Cable has consolidated gains above 1.6100 overnight. The next domestic focus comes with the CBI industrial trends survey, next Tuesday, and the release of the BoE MPC minutes to the early November policy meeting, due Wednesday. We expect both to be net-supportive for sterling.

    [USD, CHF]
    The CHF has been weakening versus both the EUR and USD, as should be expected during periods of risk-on, the current bout of which has been fuelled by dovish remarks by U.S. Fed Chairperson-designate, Yellen. This will be good news for Swiss policymakers given the renewed drop in CPI and PPI numbers into negative territory, developments which in themselves will maintain the SNB's commitment for ultra-loose monetary policy and its currency cap. EUR-CHF resistance is marked at 1.2360 and 1.2375 (the Oct-15 high). Trend support, which has been establishing during the recovery from the late-September lows, comes in at 1.2300 to 1.2280. We'll need to see risk appetite hold up if EUR-CHF is to recovery the 1.2400 handle. Bullish prospects for USD-CHF seem good given the Fed's renewed commitment to dovish policy. We look for am eventual recovery to the 0.9250 area. .

    [USD, CAD]
    USD-CAD followed the greenback's softer tone, marking time under 1.0450 amid Friday's move lower. The move under 1.0450 left a heavy tone in Asia, though buyers were still prevalent into 1.0430 and there are order book bids into 1.0400-10. Sellers have lowered offers from the 1.0470-80, while 1.0500 is still popular for corporate hedging flows.

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