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XE Market Analysis: North America - Mar 01, 2013

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The dollar steepened its bid in Europe as manufacturing PMI data fueled heavy macro fund demand. Appetite for safety was also compounded by U.S. automatic spending cuts, which kick in today. However, the main story was Germany is still the significant outperformer in Europe, though there were encouraging signs that Spain and France may be bottoming out and even Greece managed to improve. In the U.K. manufacturing PMI was a shocker and it slammed Cable within a few pips of 1.5000 from 1.5160, which generated momentum for EUR bears to take out 1.3050 stops to 1.3020. JPY underperformed on early cross flows and a general dollar bid. Today's Japan CPI data highlighted deflationary headwinds, which reinforced policy risk ahead of potentially big market moving domestic events later this month. Elsewhere, China manufacturing PMI dipped in Asia.

[EUR, USD]
EUR-USD struggled to sustain higher levels after mixed eurozone manufacturing PMI readings. There are signs that Spain and France may be bottoming out, while Italy underperformed and German continues to carry the rest of the eurozone. The headline German reading reached its highest levels since January 2012, but it only provided fleeting support for the EUR. Early on, Middle Eastern demand for EUR-JPY encouraged intra-day shorts to turn positions, but offers from 1.3100 kept buy stops from 1.3115-20 at bay. It backed away towards 1.3050 and sell stops were flushed out as Cable selling generated momentum for intra-day accounts and it moved to 1.3020 lows. The market is building up for a downside test ahead of next week's ECB meeting and this view is backed up by positioning building in EUR puts. Note, ECB's Draghi reaffirmed the ECB's accomodative stance on Wednesday, which had some participants talking about a rate cut debate next week.

[USD, JPY]
USD-JPY was underpinned by cross flows early on and then a general dollar bid. EUR-JPY had a lively start and firmed up from 120.80 over 121.40 on Middle Eastern flows, though the upside was restrained due to eurozone PMI data. USD-JPY was supported through, but was hemmed in by large expiries today between 92.50 and 93.00. There is a lot of event risk to digest out of Japan in the coming weeks and March is often a significant month due to fiscal year-end related flows. On March 11th Kuroda will present in the Diet and this will be a big day for the future policy outlook ahead of the March 15th vote on the BoJ Governor role. This could potentially negate next week's last policy meeting for Shirakawa. In early April, we get the first opportunity to scrutinise the new look BoJ board, but they will be under considerable external pressure to ease policy given the rhetoric from PM Abe and other Japanese officials.

[GBP, USD]
GBP was slammed on a shocking U.K. PMI slump. Manufacturing PMI came in at 47.9 in February from revised 50.5 reading in January and was well below market expectations of 51.0, while lending data was also weak. The numbers tipped Cable from 1.5160 through 1.5100 and the recent base at 1.5075-80. It extended through 1.5050 barriers to reach trend lows of 1.5013. Cable had shown signs of base building this week as expectations of BoE stimulus were fully priced in and economic data stabilised. This number could give GBP bears some traction, with 1.5000 still in sight. EUR-GBP took off and traded just over 0.8680, but Wednesday's resistance levels around the 0.8680 area were difficult to overcome due to EUR-USD weakness.

[USD, CHF]
EUR-CHF steepened its bid over 1.2200 and briefly traded through 1.2250 resistance. Early demand was noted out of the local market after the cross was aided by a stop hunt in USD-CHF during Thursday's N.Y. session. CTA interest got filled over 0.9350 and 0.9370 as the dollar picked up momentum on good U.S. data and today's sequester, which limited appetite for EUR, GBP and the commodity bloc currencies. Today's Swiss manufacturing PMI missed expectations by a fairly wide margin at 50.8 from market expectations of 52.1, but rather than weighing on the CHF it fueled a EUR-CHF move from 1.2250-55 to 1.2235. However, USD-CHF buying drove intra-day moves and a run over 0.9400 kept the cross elevated around 1.2250 late on in the European morning.

[USD, CAD]
USD-CAD is supportive after it broke to new trend highs over 1.0320. The pullback in risk appetite should add traction to the move, but it is territory where both fund names and option accounts are likely to cap gains ahead. European sources tipped order books carrying interest related to outstanding barriers at 1.0325 and 1.0350. Buyers are likely into 1.0270-80 and the 1.0250 area, intra-day.

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