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Market attempts to determine bottom in USD slide, EUR skeptical

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It has been the second consecutive USD-positive Asian trading session. The majority of the G10 and EM currencies underperformed the US dollar as the market is in effort to determine a bottom in the recent USD slide post-FOMC. Yesterday¹s very slight improvement in the US CPI has therefore been a reason enough to revive the USD-bulls. This behavior supports our view that the USD weakness should now be curbing.

EUR/USD advanced to 1.1029 yesterday. Impotent to break above last week¹s high (1.1043), the pair eased to 1.0901/38 range in Asia. The sentiment in EUR remains skeptical as no bailout agreement has been reached between Greece and the EU, and the month-end deadline is approaching fast. We see two-sided event risk in Greece talks. The downside risks (failure to service debt, default) have not dissipated yet the market is currently pricing in an arrangement to prevent a ³Graccident². The latter, and the base case scenario suggests a relief rally after weeks of uncertainty and should have the potential to temporary push the EURUSD higher. Break above 1.1043 (last week high) will shift the next resistances to 1.1280 (Fib 76.4% on Feb-Mar sell-off), then 1.1534 (Feb 3rd high). In the mid-run however, the divergence between the ECB and the Fed keeps the bias on the downside, with the parity being still the key target.

EUR/GBP is now testing the 50-dma / Fib 38.2% resistance at 0.73746/935 area, if broken should pave the way toward the daily cloud cover (0.74922/0.76774).

EUR/CHF moves back above 1.05 as Europe walks in, with suspicions that the SNB might be back in the game. The pair traded below what the market has accepted as the SNB¹s 1.05/1.10 implicit band, despite sustained buying interest in the majority of EUR-crosses and the break below 1.05 threshold triggered some stress on the Euroswiss futures, up to 100.890 for the first time since the SNB refrained to cut rates on March 19th scheduled meeting. The decoupling between EURCHF and EURUSD signals that safe haven flows leads to the actual Swiss franc appreciation, as the bailout talks between Greece and the EU do not finalize. We closely monitor the rate markets in order to keep track of any tension that would signal a potential, unscheduled SNB intervention. Given the global macroeconomic setting, the SNB has room to pull the rates lower in case of emergency. The market should easily absorb 15-25 basis point cut should the EUR risks materialize. (Grexit, Greece insolvability).

Luc Luyet, CIIA ­ Senior Market Analyst :³The all-time low of UK CPI in February (0.0%) and the weak UK core CPI confirm that the bar is high for the Bank of England to deliver a rate hike before the end of the year. On the other hand, in the US, headline and core CPI have slightly improved although near-term downside risks remain. Indeed, disinflationary pressures from lower import prices (due to a higher USD and weak global growth) and from medical services inflation (caused by the Affordable Care Act) could drag inflation lower for a time. However, the persistent robust domestic demand and improvements in the job market should continue to make the Fed ³reasonably confident² that inflation will move back to its 2% target over the medium-term and favor a less accommodative monetary policy in 2015.

In New Zealand, the trade data fell significantly short of market expectations. The trade surplus printed a poor 50 million NZD in February verse 350 million expected (!) as exports did not pick-up as anticipated (3.92 bn vs. 4.10 bn exp. & 3.70 bn last). The 12-month ytd deficit deepened from -1,409 million NZD to -2,181 million. NZDUSD has certainly topped at 0.7697 as we see exhaustion in positive momentum above 100-dma.

In Brazil, the BCB President Tombini sees no need to reduce the currency swap volumes. The main goal of the swap operations is to temper the volatilities on the FX market and provide a hedge for the real in this volatile environment, rather than to push for an artificial BRL appreciation. The fundamental bias in USDBRL is positive given the globally strengthening US dollar. We see 3.00/10 area as strong downside challenge and believe that Rousseff has some time to go before gaining back investors trust and pulling capital back in Brazil.

The economic calendar of the day: Swiss February UBS Consumption Indicator, French March Business and Manufacturing Confidence and Production Outlook, Spanish February PPI m/m & y/y, Swedish March Consumer and Manufacturing Confidence, IFO March Business Climate, Current Assessment and Expectations in Germany, UK February BBA Loans for House Purchases, US March 20th MBA Mortgage Applications, US February Durable Goods Orders and French February Jobseekers Net Change and Total Jobseekers.

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