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XE Market Analysis: Europe - Feb 28, 2013

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USD and JPY traded at easier levels as risk appetite held up during Thursday's Asian session after a positive Wall Street close. AUD and NZD performed well as leverage funds piled back into carry trades. Bernanke's testimony over the last two days allayed Fed policy fears, while yesterday's Italian auction gave hope that eurozone markets will not go into meltdown despite the political uncertainty in Italy. In Japan, the government formally nominated Kuroda as BoJ Governor, along with Iwata and Nakaso as his deputies and they will now go through the formal political process to be officially named in the roles. It was a heavy data calendar. Japan industrial production came in weaker than expected at +1% in January. In Australia, the Q4 capex was much weaker than expected, but plans for 2013/14 showed improvement. New home sales gained and private sector credit expanded, but both numbers were slower than the previous outturns. In New Zealand, February business confidence surge, which more than made up for the fall in January building permits.

EUR-USD was supported on dips following yesterday's short squeeze. EUR-JPY demand was the catalyst for a move on 1.3160 after it was unable to sustain levels under 1.3050. The improvement in risk appetite helped the EUR tone, but there is also mild optimism that Italy will move through the current political instability without the eurozone going through another meltdown. Yesterday's Italian auctions saw relatively good demand, albeit with higher refinancing costs, while economic fundamentals in the region as a whole are also still improving.

USD-JPY and the JPY crosses were well supported throughout. Japanese importers were notable buyers over the Tokyo fix, while over the course of the session Japanese investment flows were noted in both the dollar pairing and EUR-JPY. The cross traded up to 121.80 during the Asian morning and then pulled back to 121.10, where short term buyers were noted. AUD and NZD saw good retail interest after longs were more confident in these currencies after the clear out in recent sessions. Japan Finance Minister Aso rule out BoJ foreign bond buying, which could be seen as intervention, but added that it is still eyeing FX closely.

Cable maintained a supportive tone following yesterday's grind higher, which left it just shy of 1.5200. It pulled back by the N.Y. afternoon to 1.5120, but found buyers on dips, leaving it over 1.5150 today. News that Vodafone may delay its approach for Kabel Deutschland triggered some unwinding of speculative short positions. There was also added benefit from U.K. Q4 GDP, which was revised up to +0.3% y/y from a flat reading previously. Economic data releases out of the U.K. have been more encouraging since the start of the year, but Cable has tended to trend lower due to BoE policy expectations. However, we are now at levels where a short term base may be building.

EUR-CHF moved back over 1.2200 after Wednesday's European close and has consolidated gains overnight, with EUR-USD on a firmer footing. Most of the action since early in the week has been dominated by repositioning after EUR was severely oversold on the daily chart in the wake of the uncertain Italian election outcome. The market is now taking a slightly more optimistic view and believes that the eurozone will not return to crisis levels from last year. This should keep EUR-CHF steady and buyers are likely into 1.2200 and 1.2180 in the near-term.

USD-CAD headed back to 1.0220 overnight after a rise in risk appetite triggered good demand for the commodity bloc currencies. USD-CAD has scope on the downside after longs played the range after 1.0300 capped on Wednesday. It pulled back from 1.0275-80 and may test bids at 1.0200 if risk appetite can hold up.

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