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By XE Market Analysis October 3, 2013 3:40 am
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    XE Market Analysis: Europe - Oct 03, 2013

    The dollar remained on the back foot in Asia after yesterday's damp ADP reading, while the impasse in D.C. continued to dominate headlines. Markets are still taking a more optimistic view that politicians will eventually carve out a solution, which will avoid the U.S. going over the fiscal cliff. There was a revival in risk appetite amid signs that momentum in China's economy is well sustained after non-manufacturing PMI hit a six-month high, which weighed on JPY and boosted AUD. EUR-USD maintained a firm tone after it broke higher over yesterday's ECB press conference after ECB chief Draghi did not add further on the potential for a LTRO later this year, though all options are still on table.

    [EUR, USD]
    EUR-USD was well supported on dips after it broke higher on Wednesday in the wake of ECB's press conference and as Italy moved through the latest political upheaval. Traders were gambling on Draghi talking down the EUR. Draghi said all options were still on the table, including another LTRO, but he did not add anything new to the recent debate and also said FX was not a policy target. EUR-JPY strength in Asia lifted the dollar headline out of 1.3585 and stops were tripped through 1.3620. Very strong offers from the 1.3630 area capped, along with supply related to outstanding barriers from 1.3650 and it entered the European open just above 1.3600. Longs are still well positioned for an eventual run on 2013 highs above 1.3700.

    [USD, JPY]
    USD-JPY pressured the downside in early trade and for the second consecutive session very prominent bids emerged from institutional investors and semi-official names. It turned away from the 97.25 area and bounced back to 97.75 by the European open as short term funds played the long side, along with supportive activity from JPY-cross flows. EUR-JPY rallied from 132.20 to 133.00 as the EUR still benefited from the after effects of yesterday's ECB presser and a rise in risk appetite amid China data strength. Short term funds also cut AUD-JPY shorts and it rallied out of 91.10 to 91.70, though still a modest distance from October-1 highs near 92.40. Weekly MoF flow data revealed that Japanese investors were net sellers of foreign stocks, but were strong buyers of foreign bonds.

    [GBP, USD]
    Cable maintains a relatively tight range just ahead of 1.6200 as an overhang of offers from 1.6240-50 capped since yesterday's London open. Cable has been influenced by conflicting central bank flows. An active Asian account has been a persistent buyer on dips, while a Middle Eastern name has capped the advance, which is reportedly related to good size 1.6200 option maturities. However, after racing to 1.6261 highs on Tuesday consolidation can be expected for a short term. Today's U.K. service PMI should be an important driver for GBP ahead. After hitting multi-year highs in August some moderation is tipped for September.

    [USD, CHF]
    EUR-CHF continues to trade on a stable footing ahead of 1.2250 since 1.2200 held earlier in the week. Activity over the last 24 hours has been fairly limited, with movement dominated by fluctuation via EUR and USD. EUR-USD's run up through 1.3600 on Wednesday was offset by a USD-CHF move back through 0.9000. There is still optimism in the market that a U.S. government shutdown will accelerate negotiations to avoid going into default in two-weeks and this is limited safe haven flows to a degree.

    [USD, CAD]
    USD-CAD edged into the 1.0320 area overnight as a rise in risk appetite boosted CAD$. Activity is still quite limited in either direction and this is likely to continue until the U.S. debt situation is resolved. There are some hopeful negotiation noises coming from D.C. however, and a rebound in oil prices and equity markets could seen USD-CAD test 1.0300 if this tone continues into today's North American session.

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