FX Market Update 7-2

Market Briefs 

  • USD/JPY +0.5%, GBP/USD -0.7%, EUR/USD -0.8%, USD/CHF +0.8%
  • DXY +0.7%, DAX +0.4%, Brent -0.1%, Gold -0.5%
  • Euro set for biggest daily fall of 2017 vs dollar – Rtrs
  • DXY on track for its biggest daily gain since early January – Rtrs
  • Euro implied volatility rises as French election comes in range- Rtrs
  • UK Jan Halifax House prices -0.9% m/m vs prev 1.6% rvsd. 0.0% f/c
  • UK Halifax House prices +5.7% in 3mths to Jan vs prev 6.5%. +6.0% f/c
  • UK BRC Retail sales -0.6% y/y vs prev 1.0%. 0.8% f/c
  • DE Dec Industrial output -3.0% vs prev 0.5% rvsd. 0.3% f/c
  • China FX reserves fall to below $3 trln for 1st time since Feb 2011
  • China FX regulator says China’s FX reserves are ample
  • S.A ZAR expected to weaken almost 8% this year-Rtrs FX Poll
  • Jpn Finmin-reiterates pledge against competative FX devaluation – Rtrs
  • CH Q1 Consumer confidence -3 vs prev -13
  • SNB FX reserves at 643.668bln end Jan vs 645.325bln  at end of Dec

Looking Ahead – Economic Data (GMT)

  • 13:30  International Trade (Dec) mkt -$45.0 bn, prev -$45.2 bn
  • 13:55  Redbook Same-Store Sales Index (weekly) prev +0.2% y/y
  • 15:00  JOLTS (Dec) mkt job openings level 5.553 mn, 5.522 mn
  • 20:00  Consumer Credit (Dec) mkt +$20.00 bn, prev +$24.53 bn

Looking Ahead – Events, Other Releases (GMT)

  • n/a    Atlanta Fed GDPNow (Q1) prev +3.4% q/q AR
  • 16:45  FedTrade operation 15-yr Fannie Mae/Freddie Mac (max $675 mn)
  • 19:30  FedTrade operation 30-yr Ginnie Mae (max $1.225 bn)

Currency Summaries

EUR/USD

  • EUR/USD 1.0656 low tracking broader dollar gains on Tuesday
  • EUR plays laggard role. Led tech selling GBP/USD, USD/JPY short-covering
  • EZ bonds stable bar much higher Greek yields:
  • UST/Bund spreads widen weighing EUR/USD:
  • Potential close below 21-DMA 1.0694. Scope for daily cloud base 1.0564

USD/JPY

  • Bears managed a daily close below 111.99 fibo at the end of Mon
  • USD/JPY fell to a new year low @111.59 in Asia
  • Decent recovery gets to 112.44 in London
  • Japanese importers on the downside, bids mixed in ahead of 111.50
  • Note there are 961M worth of 111.50 strikes set to expire at NY cut
  • Important downside levels are 110 barriers & 111.15 (38.2% of 99.00-118.66)
  • EUR/JPY trades a 119.55 to 120.20 range so far

USD/CHF

  • Broad dollar gains lent support to the USD/CHF rise
  • Brk above dn TL from Jan peak at 0.9972 and 100-DMA at 1.0001
  • EUR/CHF under pressure in Europe, came close to 1.0641 Jan 31 low
  • Brief recovery ltd to 1.0666, ahead prior SNB 1.07 soft floor
  • Holds close to last wk’s 1.0637 low & 1.0623 Brexit June 24 low

GBP/USD

  • Sharp GBP/USD drop catches many traders napping
  • GBP/USD 1.2435-1.2347 in 30 minutes early in the European session
  • Plunged blamed on stops through some major techs
  • Breaks 55/21-DMAs and daily cloud:
  • Weak Halifax housing data (Jan prices -0.9% mm) cements bearish mood
  • Jan 23 low @ 1.2302 looks key. GBP spiked nr 2% & closed over 1.25 Jan 23

USD/CAD

  • Decent gains today – 1.3076-1.3203, falling Kijun-sen 1.3215 caps
  • USD/CAD a front runner as Greenback rebounds
  • Little resistance now until 55/100DMA’s at 1.3281/1.3288
  • Look for close above 200DMA 1.3138 to reinstate bullish view
  • Implied vols and CAD put risk rev skew have found support on this move

AUD/USD

  • RBA unchanged, appeared relaxed about recent GDP/CPI weakness
  • AUD 0.7633 to 7681 initially, but dropped to 0.7608, before meeting demand
  • NZD up after strong inflation expectations -0.7304-0.7375 in Asia, off since
  • USD gains back to 0.7291, y/days 0.7286 base/10DMA 0.7285 support
  • AUD/NZD 1.0465-1.0375 in Asia but recovers toward mid 1.04’s since

FX OPTIONS

  • EUR/USD vols and USD calls recover as spot falls, decent size demand
  • USD/JPY vol/JPY call gains tempered by long gamma from d/side barriers
  • Potential value in owning 1 week USD/JPY over Trump/Abe meeting
  • USD/CAD vols and CAD puts meet demand amid latest spot up leg
  • Cable gamma still performing. EUR/CHF vols recovery highs for now
  • AUD/USD spot setback lifts vols/AUD puts from 2yr lows

COMMENT
Some thoughts on ECB options as spreads widen

The signals from the Eurozone bond market cannot be ignored especially as the weakness is happening despite the backdrop of ECB QE. ECB QE has helped bond markets to price in risk while at the same time avoiding abrupt moves and volatility. Remember that these QE purchases will go down a notch from April when the ECB will be expanding its balance sheet by EUR60bn instead of EUR80bn per month.

If things do worsen for Eurozone bond markets then this may provide the ECB ammunition to expand QE. Remember the ECB has an asymmetrical bias toward QE in that it will increase the “size and/or duration” of the programme should 1) the economic outlook becomes less favourable, or 2) if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation.

However, we think an increase in QE is unlikely given the German election and that any expansion of QE would only worsen the scarcity and collateral shortage issues as well as complicate its exit strategy (tapering debate). As long as the ECB feels that there are “legal and institutional constraints” to lifting the issue(r) limits, it is likely that QE tapering instead will happen in 2018.

The next best options for the ECB are to strategically conduct purchases and maybe adjust the composition of QE. On the former, the strategic use of QE purchases would help maximise the market impact of purchases, while on the latter the ECB can buy more government bonds and less of other assets. The spread widening on France and Italy is understandable given concerns over the presidential election for the former and potential early elections/NPL issue on the latter. The ECB will not stand in the way of this adjustment as long as markets do not once again flirt with the idea of Eurozone breakup risks. Our preference is to play for Italy to underperform France and will look to play this via a 5yr France/Italy spread widening from the current spread of 96bps (using mids) stop at 80bps, and target of 180bps

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