FX Market Update 3-2

Market Briefs

  • GBP, gilt yields skid after BoE disappoints rate hike bets
  • BoE sharply raises 2017 GDP forecast to +2.0%; Some MPC members “a little closer” to inflation overshoot limit
  • BOE’s Carney: Can see scenarios to move rates in either direction
  • BOE’s Carney: Risky to relocate London-based markets after Brexit
  • BOE’s Carney: Any inflation overshoot is temporary, Mon pol could be tightened faster if pay growth picks up
  • US jobless claims fall 14k to 246k from 260k ; 4-wk avg claims +2,250 to 248k
  • US Q4 productivity slows in Q4 to 1.3% from 3.5%, beats RTS f/c 1%; labor costs 1.7% v 0.2% pvs
  • White House: Treasury action on Russia routine, not easing sanctions
  • ECB’s Draghi: Benefits of leaving the euro are a mirage: govt’s have themselves to blame for their econ problems
  • ECB’s Coeure: Inappropriate to withdraw stimulus while inflation relies on stimulus (DJ)
  • ECB’s Praet: don’t see impact of headline inflation in 2nd round effects; have to be careful when changing policy
  • ECB says will not focus on transient, oil-fuelled inflation bounce; repeats need for stimulus in bulletin
  • LatAm currencies up as Fed refrains from signaling March hike

Looking Ahead – Economic Data (GMT)

  • 22:30 AU AIG Services Index Jan 57.70-prev
  • 01:45 CN Caixin Mfg PMI Final Jan f/c 51.8, 51.90-prev

Looking Ahead – Events, Other Releases (GMT)

  • No Significant Events

Macro Themes in Play

  • USD, rates broadly lower on carryover from dovish Fed, markets left confused by cautious stance after aggressive December play, March rate hike now trades at only 1-in-5 chance, rates/dollar bulls try to hang on for good US jobs report Friday
  • Markets mixed, bank sector struggles against falling rates, losing patience with Washington, politics holding up key cabinet nominations, insiders warn tax reform possibly not until 2018
  • USDJPY lower, JGB yield highest in a year despite BOJ buying, commitment to stabilize, BOJ losing control?; Cable down after BOE keeps easing bias;
  • EUR firm despite Euro short rates down for fifth day, currency notably diverging from underlying US-Euro rate diff correlation, ECB Praet says QE still needed; USDCHF tests, holds 200 dma again, bear objective still .9700
  • Commodity and high beta FX higher, carry players jump into action on lower rates/USD; Gold best in ten weeks, provides leadership for FX

Currency Summaries

  • Pair lifts in Europe’s morning, NY opens near 1.0805, choppy early-on but lift resumes
  • USD sold across the board, EUR/USD pierces the daily cloud top & hits a 1.0829 high
  • Rally stalls as UST yields lift a bit & USD bears lighten up ahead of US jobs data
  • EUR/USD slides in NY’s afternoon, pair slips below 1.0770 late in the day
  • Daily techs warn bulls, gravestone doji candle forms & RSI diverges on the new high
  • EZ Jan Markit services & Dec retail sales are data risks in Europe’s morning
  • Market to be focused on US jobs, bulls need a weak print to regain control


  • USD/JPY recovered in NY after another defense of barriers at 112
  • 112.05 low came shortly after Claims & Productivity data passed muster
  • Slow P/T rally underway since, should see rsst by 113 tested soon
  • Hourly Kijun at 112.85 capping thus far
  • 112 is key tech support w 38.2% of the Nov-Dec rally at 111.99
  • JPY bears trying to shrug off WH barbs re JPY weakness & BOJ largesse
  • Trump & Abe & teams to meet Jan 10; latter trying to ease tensions
  • GBP/JPY hammered after MPC & Carney testimony
  • EUR/JPY looks to close below 55-DMA for 1st time since Oct 26
  • Day’s range back inside the daily Cloud also bodes poorly
  • Dec BOJ Minutes and Jan PMI (Nikkei) out tonight pre NFP Fri


  • USD/CHF again found support by the 200-DMA & 61.8% of the Nov-Dec rise
  • Early USD weakness was followed by short P/T ahead of Fri’s NFP report
  • Pair still trading inside Tues.’s 0.9862-9966 range & below the Cloud
  • EUR/CHF in a tiny 1.0675-700 range; latter the SNB’s prior soft floor
  • Early-week slide looking more anomalous, but trend remains down
  • Swiss Dec Retail Sales fell 3.5% y/y v +0.8% in Nov


  • Cable’s move to 8-wk high above 1.270 was short-lived, ends NorAm by 1.2530
  • Offers around 1.27 capped cable after its early Ldn break thru 1.2680 [nIFR2PWvFz]
  • GBP/JPY sell order catalyst for fall to 1.2637, GBP declined further post BOE hold
  • Bank of England, ramping up growth forecast, in no mood for rate hike [nL5N1FN4D9]
  • EUR/GBP rallied 1.15% to end NY 0.8600, GBP longs lighten on less-hawkish BOE
  • UK short-sterling futs rise, UK ’17 hike probability to 35% from 50% despite rising inflation
  • UK govt will not allow Scots indyref2 pre-2020 [nL5N1FN2Y9] [nS8N1EY00L]


  • CAD best finish since September, commodity FX broadly higher on dovish Fed
  • NAFTA renegotiation fears fade, seen as overblown
  • Only potential pitfall for CAD bulls is oil, trades very toppy, energy sector weak
  • Big option expiry (1.3Bln) Friday at 1.3050


  • Europe adds to gains from Asia, NY opens near 0.7665, bull pressure persists
  • Broad based USD weakness & GBP/AUD dive near 1.6310 lift AUD/USD to new high
  • 0.7696 high made, offers into 0.7700 stall the rise, USD bid emerges though
  • USD bears lighten up ahead of US NFP, AUD/USD sinks, nears 0.7660 late
  • Techs are bullish, RSIs biased up & 76.4 Fib of 0.7778-0.7160 cleared
  • No OZ data due, China Caixin Mfg PMI & US jobs eyed, if jobs miss rally likely extends
  • November’s high then comes into play


  • Bull pressure in Europe’s morning as USD is broadly offered, NY opens near 0.7310
  • Rally extends as USD stays heavy in early NY, 0.7338 high made, offers into 0.7350 help stall
  • USD bid emerges, NZD/USD slips from the high, pair gives up most of the day’s gains
  • Pair slides below 0.7290 late in the day as USD shorts cover ahead of US jobs data
  • Doji candle forms on daily chart, suggests indecision, monthly chart leans bullish
  • China Jan Caixin Mfg PMI & US jobs data are key data risks due


  • USD/MXN remains offered in wake of dovish Fed hold, dips to low at 20.4345
  • Pair bounces off low set to end NY 20.4700, Mex OIS implies 25bp hike Fed 9
  • earlier futures indications were for 50bp Mex hike, reduced US rate path aid MXN rise
  • USD/BRL -0.29% to 3.12, off session low 3.1081; Sr official sees BRL 3.20-30 in ’17
  • Brazil may surprise with growth above 1 pct if pension reform passes [nL1N1FM24U]
  • USD/CLP rides lwr 21-d Bolli (640.10) lower ends NY 641.80, despite copper -0.8%

Bank of England bias still toward further easing
There are hints of a more hawkish BoE tone but overall the c.bank stuck with the script that it can respond “in either direction, to changes to the economic outlook”. Market rate expectations are helping to do the BoE’s job by tightening financial conditions and in turn containing inflation. The BoE trimmed its two- and three-year inflation forecasts [nU8N1A4002] but market-based measures still show a roughly 50% probability of a rate hike over the next 12 months. The lower inflation forecast is that much more interesting given the higher 2017 and 2018 growth expectations. With the BoE having lowered its forecast of the natural rate of unemployment to 4.5% from 5.0%, the pickup in wages seems less likely and thus the bias is still toward further BoE easing. We still see the next move from the BoE as easing but in the current Brexit climate it is difficult to pinpoint a time for this shift


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