FX Market Update 2-2

Market Briefs 

  • USD/JPY -0.8%, GBP/USD -0.1%, EUR/USD +0.4%
  • DXY -0.3%, DAX -0.2%, Brent +0.8%, Gold +1.0%
  • Dollar index slips to lowest since mid-November at 99.233
  • GBP/USD helped off 7wk peak above 1.2700 by GBP/JPY sell order
  • EM rally sees TRY, ZAR and MXN climb vs USD
  • Gold rises to highest since Nov 17 at $1,223.62/oz
  • EZ Dec Producer prices 0.7% m/m, 1.6% y/y vs prev 0.3%/0.1%. 0.4%/1.3% f/c
  • UK Jan Construction PMI input prices compenent rises to 73.2 fm Dec 72.4
  • CH Dec Retail sales -3.5% vs prev 0.8% rvsd
  • Australian Dec trade surplus jumps to A$3.5bln, beats A$2.2bln f/c
  • AUD boosted by record Aussie trade surplus, 0.7675 high
  • Reckitt Benckiser in talks to buy Mead Johnson for $16.7 bln – Rtrs
  • JP considers buying more U.S. energy as Abe prepares to meet Trump – Rtrs

Looking Ahead – Economic Data (GMT)

  • 12:30  Challenger Job Cuts (Jan) prev 33,627
  • 13:30  Initial Jobless Claims (Jan 28 week) mkt 250k, prev 259k
  • 13:30  — Continued Claims (Jan 21 week) mkt 2.065 mn, prev 2.100 mn
  • 13:30  Productivity (Q4) mkt +1.0% q/q AR, prev +3.1% q/q AR
  • 13:30  — Unit Labor Costs (Q4) mkt +1.9% q/q AR, prev +0.7% q/q AR
  • 14:45  ISM New York Business Conditions Index (Jan) prev 63.8
  • n/a   Chain-Store Sales (Jan)

Looking Ahead – Events, Other Releases (GMT)

  • 12:00 BoE MPC policy announcement, no changes/9-0 vote eyed, infl report
  • 12:15 ECB Pres Draghi speaks at Ljubljana ECB/Slovenia CB conf
  • 12:30 BoE Gov Carney press conference on quarterly inflation report.
  • 14:45 FedTrade operation 15-year Fannie Mae/Freddie Mac (max $675 mn)
  • 15:45 FedTrade operation 30-year year Fannie Mae/Freddie Mac (max $1.825 bn)
  • 16:00 ECB Angeloni speaks at Halle, Germany LIW event.
  • 17:00 ECB ChiefEcon Praet, Buba Dombret speak at Berlin banking conf
  • 18:45 ECB Coeure speaks at Paris AEF dinner

Currency Summaries

EUR/USD

  • EUR/USD trades highest since Dec 8 2016 at 1.0819
  • Widespread USD weakness as players fearing US policies pare longs
  • EZ PPI leaps to 1.6% yy in Dec from prior 0.1%
  • FX moves running counter to bond moves that are supportive of USD
  • Strong resistance @ daily cloud top 1.0826 & Oct low 1.0851
  • Minor support 1.0765-75 and then 100/200-HMAs 1.0740/34

USD/JPY

  • USD/JPY has fallen from 113.36 to 112.25
  • USD/JPY was helped to its low due to large GBP/JPY sell order
  • Bids remain in size ahead of 112.00 option barrier
  • 119.99 is 38.2% retrace of the 101.19 to 118.66 rise
  • Large stops are said to be clustered below 112.00

USD/CHF

  • Weaker dollar helped send USD/CHF lower from 0.9938 to 0.9873
  • Technicals helpw hinder recoveries as 0.9964 10-DMA weighs
  • Key support levels in focus, 200-DMA at 0.9874 threatened
  • EUR/CHF recoevry ran into 1.0700 offers and was rejected lower
  • 1.0678 is the European AM low

GBP/USD

  • GBP/USD offers around 1.27 capped pair after its early Ldn break thru 1.2680
  • GBP/JPY sell order flagged as catalyst for subsequent drop to 1.2637
  • 1.2637 = 23.6% of 1.2412 (Tuesday low) to 1.2706 (7wk high)
  • EUR/GBP rose from 0.8508 to a high of 0.8555 during the European am
  • BoE MPA & QIR 7am ET, 9-0 Bank Rate vote expected. Carney briefing 7.30am+ ET

USD/CAD

  • USD/CAD extended south to an intra-day low of 1.2982 during the European am
  • Only the second day USD/CAD has traded sub-1.30 since Sept 9 (Tuesday was first)
  • 1.3102 was Wednesday’s high, before relatively dovish Fed statement

AUD/USD

  • AUD/USD extended north to a fresh 2mth high of 0.7675 during the European am
  • 0.7653 was Asia high, after stops above 0.7610 tripped on record Oz trade surplus
  • AUD/NZD extended north to 1.0504 (10-day high) during the European am

NZD/USD

  • NZD/USD scaled an intra-day peak of 0.7317 during European am amid USD weakness
  • 0.7243-0.7310 was Asia range (low before high). 0.7300 expiry Friday, NZ$317mn strike

FX OPTIONS

  • USD/JPY lower but vols/skew suggest no real downside concerns yet
  • EUR/USD vols sit on 3 months lows – USD call sales weighing this week
  • Cable gamma performs amid choppy spot – short dated vols bid pre MPC
  • AUD/USD vol/skew at 2yr lows – good levels to reinstate d/side longs
  • O/n vols gets NFP – JPY and Cable break evens dearest around 100 pips

COMMENT

BoE – Unlikely to tighten policy, 9-0 for unch rates/QE

The message that “monetary policy can respond, in either direction” will be repeated at the February BoE meeting on Thursday. We still expect the BoE to deliver more QE  but much will depend upon UK/EU Brexit negotiations that are likely to begin once Article 50 is triggered.

With inflation likely to rebound sharply over the coming months, BoE’s Carney will once again reiterate the limits to the “extent to which above target inflation can be tolerated”. With market based measures of inflation elevated and GBP close to its lows, the risks are not only to the upside on inflation but also the potential for inflation expectations to become unanchored.

A rate hike would have been a real possibility given that the economy has surprised with its resilience since the Brexit referendum last year. However, the BoE is cognisant that despite this resilience the economy is at risk from downside risks to consumption/investment. An expectation that the risks related to growth will materialise is likely to prevent the BoE from tightening policy.

We continue to see GBP risks biased to the downside although the unit is oversold currently with a lot of negative news already priced. Holding longer dated GBP vol via OTM puts remains both a portfolio defensive strategy as well as a view on further GBP weakness. We continue to favour being long 1y or 2y OTM GBP puts to play for GBP weakness on difficulty in funding the UK’s c/a deficit as well as higher vol related to tough Brexit negotiations

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s