XE Market Analysis: North America – Mar 04, 2014
An unwinding of risk-off positioning was prompted by signs that Russia is de-escalating the Ukrainian crisis. Moscow ordered its troops engaged in military exercises near the Ukrainian border back to base. Putin subsequently said that Russia would only use force as a last resort and that he his not thinking of annexing Crimea, although the people there should have the right to self-determination. Global stocks rallied, sovereign bonds and the price of gold fell. Russia’s MICEX surged 5%, recovering about half of yesterday’s hammering, while the ruble recovered against both the dollar and the euro. Among the main currencies, the JPY and CHF have dipped as the usual correlation to swings in rise appetite unfolds. USD-JPY rallied to a high of 101.92. EUR-JPY popped back above 140.00. EUR-CHF also flipped higher, as did EUR-USD, which sprang to the upper 1.37s. AUD-USD gravitated to the mid-0.89s after failing to sustain gains following above-forecast building approvals data as the RBA said the AUD still remained high by historical standards.
The euro has rallied after Russia ordered its troops engaged in military exercises near the Ukraine border back to base, although troops still remain stationed in the Crimea peninsular. EUR-JPY popped back above 140.00 and EUR-CHF also flipped higher as the usual correlation to swings in rise appetite unfolded. EUR-USD also sprang over 40 pips to a 1.3773 peak before settling. Bigger picture, however, we think the euro’s rally last week following the inflation data was an over-reaction as the 0.8% HICP rate outcome is hardly going to change the ECB outlook, and speculation of the central bank making further monetary easing will likely remain. Good selling interest is reported above 1.3800, and it should be noted that there were multiple rejections from 1.38-plus levels over the October to January period.
There remains muted overall directional impetus in USD-JPY. BoJ policy would favour continued weakness, but the threat of China slowdown (and now geopolitical tensions), with the associated negative consequences on global stock markets, is an offsetting yen-supportive force. The 102.00 level offers near-term resistance, ahead of 102.50 and last Friday’s three-week peak at 102.83. Support is at 101.00, ahead of major support at 100.00-100.90, the latter of which is the 200-day moving average.
We remain wary about the sustainability of GBP-USD’s rally that’s been in place since last July, while EUR-GBP looks to be building a base above 0.8200 level. A key support zone is in EUR-GBP given by 0.8157-0.8200, a region that has marked a series of daily lows since mid-January. Resistance in Cable is pegged at 1.6700 and 1.6768 (Friday’s high), ahead of 1.6800-1.6822. From a fundamental perspective, the recent phase of above-trend U.K. growth is likely to moderate, partly due to the rich levels of sterling, which was flagged by a weak export orders figure in the February manufacturing report. The BoE has already highlighted sterling as a concern, and we can expect MPC members to sound out dovish remarks to the effect. Meanwhile, on the USD side of the equation, we see the U.S. economy remaining on a recovery path and the Fed continuing to taper QE assets. The BoE’s MPC meets for its March meeting this week, though this should once again be a non-event for markets, at least until the minutes to the meeting are released on Mar-19, as no change in policy is a near certainty and the MPC is not likely to issue a statement.
EUR-CHF flipped higher as the usual correlation to swings in rise appetite unfolded following news that Russia ordered its troops engaged in military exercises back to base. The cross rose back above 1.2150, putting in some distance from the fresh cycle low of 1.2104 that was seen on Monday, which is the lowest level seen since June last year. We don’t advise speculative accounts to hold long CHF exposures below 1.2100 given the threat of SNB intervention ahead of 1.2000. SNB-speak this month reaffirmed its strong commitment to maintaining the 1.20 limit peg, and would only consider removing it if inflation was much higher (CPI has been steady at just 0.1% y/y over the last three months, and the outlook remains benign).
USD-CAD looks to be forming a potential double top formation, which is a classic reversal pattern. The pair’s capping out just shy of 1.1200 on Feb-21 left the late January major trend peak at 1.1224 unchallenged. There price action has been accompanied by a drop in upside momentum, and together these point to a possible end of the bullish phase that was seen between October and January, implying potential for a sustained retracement or a period of stasis. Near-term support comes in at 1.1040-50, ahead of 1.1020-25.