Profit Taking in Yen Crosses Drags Majors Lower

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Market Drivers for December 11, 2013
Yen crosses come in for profit taking driving majors lower
French NFPs in line
Nikkei -0.62% Europe .36%
Oil $98/bbl
Gold $125/oz.

Europe and Asia:
JPY Core Machinery 0.6% vs. 0.9%
EUR Final CPI 0.2% vs. 0.2%
CNY New Loans 625B vs. 585B

North America:
No data

Profit taking in yen crosses sent majors lower in what were otherwise very uneventful Asian and European trading sessions with no newsflow to move the market. A day after GBP/JPY and EUR/JPY set multi-year highs the pairs faded from their peaks as profit taking drove them lower throughout the night.

The fall in the yen crosses spilled over into the majors as both euro and cable backed off their highs with cable dropping through the 1.6400 level while euro tumbled below 1.3750. After a long and relentless rally in both pairs some retrace was due and tonights quiet economic calendar serves as a perfect opportunity for longs to lighten up their exposure.

We have noted for several days that despite EUR/USD seemingly unstoppable climb higher, the pair was likely to see resistance at the key 1.3800 figure near the yearly highs. Yesterday price action appears to have confirmed that thesis as euro ran out of gas just ahead of the 1.3800 barrier. The pair continues to consolidate its move but if the euro drops below the 1.3700 level it may see a steeper correction in the weeks ahead.

The rise in the pair has been driven largely by capital flows chasing relative investment value in European assets, but with end of the year nearly upon us much of that move may have already occurred in which case the EUR/USD is likely to stall and retreat from the current levels. The economic conditions in Europe remain lackluster at best and monetary policy is likely to continue to be highly accomodative for the foreseeable future. If US policymakers signal that a taper is coming no later than January then the pair is likely to shift lower as capital flows turn back to the dollar.

In the meantime the North American calendar is barren today and trading could remain quiet for the rest of the session. Tomorrow the market will get a glimpse of the US Retail Sales numbers and if the data surprises to the upside it will provide yet another supporting piece of evidence for the taper and will likely drive EUR/USD further away from its recent highs.

Boris Schlossberg
Managing Director

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