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Tuesday 2 Sept. 2014 17:05

XE Market Analysis: Europe - Mar 04, 2013

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The dollar is underpinned in early trade after Asian stocks were mostly lower overnight following a sharp drop in China after Beijing plans to levy a 20% tax on citizens selling their residential homes. EUR was supported into 1.3000 throughout the Asian session, but Friday's break lower should leave downside risk, particularly with this week's ECB meeting in focus. Cable has steadied after it extinguished long standing barriers at 1.5000 on Friday, but risk is on the downside amid rising expectations for more BoE policy stimulus. Cable plunged after weak manufacturing PMI data, but it accounts for just 10% of GDP and Tuesday's services sector PMI will be more important for the outlook. In Japan, incoming BoJ Governor Kuroda vowed to end deflation as soon as possible and backed more bond buying, which fueled yen selling on upticks, though repatriation flows related to the Japanese fiscal year-end were noted.

EUR-USD opened in Asia on a slightly firmer footing after it bottomed out on Friday just ahead of 1.2965. It edged off 1.3025 and tested 1.3000, where support was noted over the course of the session. The downturn in regional stocks left bias on the downside and support around 1.2945-50 is a near-term focus intra-day and then 1.2900 thereafter. Sellers are tipped from the 1.3040-50 area and larger offers are seen from 1.3080. ECB's Coeure warned that cental banks cannot replace government inaction, adding that prolonged fiscal profligacy would debase the EUR.

USD-JPY experienced choppy two-way flows. It pulled back from 93.70 early on to trade into 93.35, where Japanese importer bids were noted. However, another attempt to sustain higher levels failed amid talk that Japanese repatriation flows may have gone through ahead of the fiscal year-end later this month, leaving it close to 93.30 during the Asian afternoon. Kuroda made his first address at the Japanese parliament for his confirmation hearing and vowed to end deflation as soon as possible. Kuroda said BoJ has not bought enough assets to end deflation and the most natural way to ease policy further was to increase JGB demand and buy longer-dated bonds.

Cable is the heavier side just in front of 1.5000 after it reached 32-month lows under 1.4990 on Friday. A very poor manufacturing PMI raised the debate over BoE policy easing and there are some analysts that even tip a move next week. However, manufacturing makes up just 10% of the U.K. economy and other U.K. data hasn't been too bad of late. Tuesday's U.K. services PMI is going to be more important for policy and where the pound goes next. There are some very bearish long term forecasts now and several leading money managers are short, including Soros, who infamously triggered sterling's crash out of the ERM in 1992. On the downside, support levels at 1.4965 to 1.4950 could attract in the coming sessions.

EUR-CHF maintained a stable tone close to 1.2260 after it posted a strong rally from 1.2230 to 1.2290 on Friday. A stop hunt in USD-CHF was the catalyst for the EUR-CHF rally and it has held on to a large part of its gains. Dip buying was noted into 0.9410-20 in Asia after it pulled back from just over 0.9460 on Friday as profit taking went through into the weekend. The near-term bias should remain with the topside though, with risk aversion influencing and the EUR pressured ahead of the ECB policy meeting. On the topside, there are good offers ahead of 0.9500, where outstanding option barriers are noted.

USD-CAD bias is still with the topside, with good demand from short term accounts and position traders following the pullback from 1.0340 to 1.0265 on Friday. The in-line Canadian GDP outcome was the catalyst for profit taking into the weekend, but another test of recent highs around 1.0340 looks likely with appetite for risk a struggle as the week gets underway. Offers on the topside are noted up to 1.0340, where an options presence is also tipped ahead of 1.0350 barriers.

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