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XE Market Analysis: North America - Mar 07, 2013

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The dollar saw a correction during a fairly subdued Asian and European morning sessions as participants waited for central bank decisions from the ECB and BoE and tomorrow's U.S. February payrolls report. GBP rallied sharply following the BoE's decision to refrain from expanding its QE program. The JPY was undisturbed by the as-expected BoJ decision to leave policy unchanged, Thursday. USD-JPY consolidated just of trend highs in a tight range centered around 94.00, while EUR-JPY tracked EUR-USD higher and made a 10-day high.

EUR-USD moved back above the 1.3000 level in Europe and making a peak of 1.3029, which is about a two-thirds retracement of yesterday's drop. The pair had logged a three-month low of 1.2961 yesterday. Trendline resistance comes in at 1.3045 and yesterday's high is at 1.3070. Having become stretched to the downside, the rebound occurred ahead of today's ECB meeting and tomorrow's U.S. jobs report as nearer term market participants trim net short euro positions. While the ECB is widely expected to keep rates on hold today, Draghi's press statement is eagerly awaited as expectations for rate cuts in coming months have been fueled by lower than expected inflation numbers. Draghi can also be expected to deliver a relatively dovish statement with growth and inflation projections expected to be revised down. That should help curtail EUR-USD's upside potential.

The JPY was undisturbed by the as-expected BoJ decision to leave policy unchanged, Thursday. USD-JPY consolidated just of trend highs in a tight range centered around 94.00, while EUR-JPY tracked EUR-USD higher and made a 10-day high. Trend support in USD-JPY is noted at 93.20-30, which encompasses both a trendline and the 20-day moving average, though there is market talk of good buying interest around 93.70-80. The 33-month peak of 94.77 is the major focal point to the upside, which we expect to be breached as the market anticipates fresh BoJ policy easing measures at its early April policy meeting, though seasonal repatriation ahead of Japan's fiscal year end at the end of March may slow upside progress. The BoJ has ample reason to ease policy further, but held fire today ahead of the new central bank policy board takes place for the early April meeting. Governor Shirakawa will step down March 19. ADB Governor Kuroda, who is a strong advocate of aggressive easing, is on his way to being confirmed as the next BoJ Governor.

GBP rallied sharply following the BoE's decision to refrain from expanding its QE program. GBP-USD surged back above 1.5000 after making a fresh trend low of 1.4966 during Asian trade (Reuters indicated price low). The price action breaks the near-term trend and should set up a period of consolidation. There had been a degree of market speculation in favour of the MPC announcing another round of asset purchases. The stronger than expected February services PMI release went some way to cement our no-change view aftr the construction and manufacturing PMI shockers, which in any case can be partly explained by one-off factors. A report in the FT had apparently helped sterling's cause, according to a market source, as it argued that BoE Governor designate Carney will be given more powers at BoE. EUR-GBP hit 10-day highs ahead of the BoE announcement. For now, February's major-trend peak at 0.8764 looks out of reach.

EUR-CHF broke higher after a model fund fished for stops through 1.2300 on Wednesday. A series of resistance levels gave way and it extended through 1.2310. The next level of important resistance lies at 1.2345 and may cap in the near-term. With EUR-USD fairly static around 1.3000, USD-CHF has taken off from 0.9405 and pushed back over 0.9480, and through option barrier exposure at 0.9450. However, option defensive selling is expected to pick up due to outstanding 0.9500 barriers. EUR-CHF should be supported on dips now after the bullish break and with risk holding up, though EUR longs may be a bit restrained ahead of today's ECB meeting.

USD-CAD spiked up to 1.0330 following the BoC announcement, where rates were left unchanged, as expected. The dovish tone of the statement had been anticipated over the past couple of days, some of which was likely priced in ahead of time. The statement included "somewhat more" subdued inflation versus the January forecast, and "material exess capacity". All in all, not indicative of tightening any time soon. Option barriers at 1.0350 were defended into the highs of 1.0337, and the pairing subsequently eased back to 1.0300 before stabilizing.

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