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By XE Market Analysis October 17, 2013 3:36 am
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    XE Market Analysis: Europe - Oct 17, 2013

    Risk assets posted a relief rally after the U.S. Senate and House passed the budget deal, which will extend the debt ceiling till early February and reopen the government till the middle of January. However, after the fractious negotiations over the last few weeks there is already a bit of caution as market participants brace themselves for further drama next year. For FX markets the deal gave a boost for speculative positioning, but there were no aggressive flows. The dollar edged up in early Asia, which lifted USD-JPY to 99.00, but it was unable to sustain higher levels due to very good order flow, while EUR and GBP benefited from long position building. AUD maintained robust levels and edged out early highs above 0.9565. It hasbeen on of the currencies that has benefited the most from the drama in D.C. amid fund demand.

    [EUR, USD]
    EUR-USD started the session close to 1.3530 and tested both sides of the market. The EUR headed back to 1.3515 as the U.S Senate and House passed the debt bill, but trended higher on long position building and as USD-JPY toppled after it was unable to sustain 99.00. During Wednesday's session EUR pushed through a series of bids down to 1.3470, but support at 1.3450-60 from mid-September held and the subsequent move higher bodes well for a topside move. The dollar may see limited upside in the near-term as Washington defers the more difficult issues until early next year, while the potential for Fed tapering has also been pushed back by the prolonged government shutdown.

    [USD, JPY]
    USD-JPY and the JPY crosses posted an early rally into the U.S. vote on the debt bill. Once the bill was passed USD-JPY and the crosses headed lower despite a move up in the Nikkei 225. USD-JPY topped out into 99.00 and reverted to the 98.40-50 region on profit taking. Offers at 99.00 included exporters and option related activity amid heavy exposure to gamma between 99.00 and 100.00. EUR-JPY threatened offers between 133.80 to 134.00 on early retail interest, but hedging activity clipped gains and it ebbed back below 133.50.

    [GBP, USD]
    Cable rebounded back to 1.6000 as the dollar weakened as U.S. politicians reached a deal to reopen the government and extend the debt limit. On Wednesday thin trading conditions triggered a stop hunt on the Cable downside as the dollar strengthened. 1.5895 dealt during the N.Y. morning, but good demand resurfaced and it extended back over 1.5950. In Asia, dip buying was evident and it moved back across 1.6000 by the London open. The Fed are widely expected to remain on hold into the year-end after the prolonged government shutdown, while U.K. fundamentals continue to support demand for U.K. assets.

    [USD, CHF]
    CHF is mixed. USD-CHF has traded back below 0.9100 as the dollar weakened in Asia and remains on the defensive in Europe. Further dollar losses are widely anticipated as the Fed are seen on hold into the year-end. The U.S. debt deal was welcomed, but cynics suspect that the short term deal simply delays the more difficult decisions until early next year and this is undermining the dollar. EUR-CHF is net unchanged near 1.2350 as EUR and USD flows offset each other.

    [USD, CAD]
    USD-CAD extended losses and traded into the 1.0310 area. The dollar came under pressure over yesterday's N.Y. afternoon and in Asia. Macro funds are positioning for further dollar losses and this could tip USD-CAD back towards near-term support between 1.0270 and 1.0250.

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