FX Market Update 22-3

Market Briefs

  • EUR/USD -0.2%, USD/JPY -0.3%, GBP/USD -0.1%, DXY +0.1%
  • DAX -0.6%, FTSE -0.8%, Brent -1.3%, Gold +0.1%, Copper -0.7%
  • USD/JPY hits 4-month low on waning risk appetite – Rtrs
  • LME copper hits near two-week low on Trump policy doubts – Rtrs
  • EZ Jan S/A Current account balance 24.1bln vs prev 30.8bln
  • ECB Villeroy: Clearly not the time to stop pursuing accommodative policies – Rtrs
  • Markit UK Mar household finance index 45.3 vs 48.1 Feb, 40mth low
  • UK households most downbeat about outlook since 2013 – Markit – Rtrs
  • Swedish cbank says ultra-loose policy has had desired effect – Rtrs
  • ZAR bucks softer EM bias as S.A Q4 C/A Def. narrows

Looking Ahead – Economic Data (GMT)

  • 11:00  MBA Weekly Mortgage Application Indices
  • 13:00  FHFA Home Price Index (Jan) prev +6.2% y/y
  • 14:00  Existing Home Sales (Feb) mkt 5.57 mn SAAR, prev 5.69 mn SAAR
  • 14:30  EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

  • 15:45  FedTrade 30-year Fannie Mae/Freddie Mac (max $1.15 bn)

Currency Summaries
EUR/USD

  • EUR/USD slightly lower 1.0819 to 1.0776 in Europe
  • EUR/JPY selling leads as traders turn more risk averse
  • FX traders influenced by softer stocks/commodities
  • Unusually weak c/a data spurs some profit-taking of EUR longs
  • S/A C/A surplus EUR 24.1bn Jan from 30.8bln, NSA EUR 2.5bln from 46.9bln

USD/JPY

  • USD/JPY range has been 111.13-111.79
  • 111.50 option barriers have been taken out as we predicted
  • 111.15 – 38.2% retrace of the 99.00 to 118.66 (June to December) rise
  • 110.00 barriers in focus but thick weekly cloud 103.69-111.39 limits d-side
  • “Trump trade”  unwinds due to concerns US health care bill will not pass
  • Doubts spread to the rest of Trump’s fiscal agenda
  • Risk off environment hits Nikkei 225 which closed down over 2%
  • Nikkei futures 48/72H log correlation with USD/JPY is high at +0.75/+0.72

EUR/CHF

  • EUR/CHF -0.3% to 1.0707, earsed all on Monday/Tuesday’s gains
  • Bids into 1.0700, likely SNB are working a soft 1.07 floor
  • 1.0746 Asia high. 1.0738 in Europe. Capped yday by cloud top
  • USD/CHF down early doors on risk aversion. 0.9911 low tested
  • Small recovery to 0.9928 but ltd. 200-DMA break is bearish

GBP/USD

  • GBP/USD scaled fresh Mar peak of 1.2507 after early Ldn break thru 1.2495
  • 1.2495 was Tuesday high after more shorts squeezed on above f/c UK CPI
  • IMM net GBP shorts upped to record high pre-dovish Fed hike/hawkish BoE hold
  • Next IMM data (week to Mar 21) due Friday. 1.2455 = low water-mark since 1.2507
  • EUR/GBP has traded a modest 24 pip range thus far Wednesday, 0.8644-0.8668

USD/CAD

  • USD/CAD rose half-a-cent to 1.3409 during the European am as oil prices fell
  • 1.3409 = 1wk high. WTI circa $47.50/barrel at 6.30am ET, 75 cents lower on day

AUD/USD

  • AUD/USD plumbed 1wk low of 0.7640 after breaking 0.7651 (Asia low)
  • 0.7651 = 38.2% of 0.7491 (Mar 9 low) to 0.7750 (Mar 21 high)
  • Drop to 0.7640 influenced by decline in risk appetite/commodity losses
  • AUD/USD scaled 4mth peak of Tuesday—before S&P 500 fell 1.24%

NZD/USD

  • NZD/USD threatened 0.7016 after falling from 0.7048 during the European am
  • 0.7016 was Asia low (0.7010 was Monday’s low). 0.7090 = 19-day high Tuesday
  • RBNZ is expected to keep OCR at 1.75% at 4pm ET, accompanying statement in focus
  • AUD/NZD plumbed 12-day low of 1.0874 during European am after profit-taking on longs

FX OPTIONS

  • Risk aversion boosted vols since yesterday – especially JPY and AUD
  • AUD/JPY 1mth vol almost 3.0 vols higher to 11.25
  • USD/JPY 1mth vol has fully retraced post FED slide to 7.5, now 9.4
  • USD/JPY 1mth risk reversals tests Dec high at 1.2 JPY calls vs 0.25 Mon
  • Market wary of a break down through 111-110.00 barriers
  • EUR/USD topside covering apparent this week. Cable vols off lows

COMMENT
Equity correction risks help vols normalise, no range break for bonds

One of the important themes we have been highlighting recently is the sharp reduction in market based measures of implied volatility. This has been seen in FX, bond and equity markets, but has been more striking in equities especially after the FOMC/Dutch election combo last week .The lower level of implied vols saw EuroStoxx50 implied vols hit their lowest level since 1999, when data was first collected.

The correction of more than 1% yesterday on the S&P500 has now seen a jump in implied vols to levels that prevailed at end-Feb/early-March, but are still at the bottom of their range for the year. Vols have simply moved from being excessively low, but remain far from signalling the kind of fear and protection buying that would suggest a correction in equity markets will be sustained.

The current correction could help to take prices lower by another 5%, but this would only be giving back the gains that have been made since the US election — S&P500 up 9.5%, DAX up 10.5% and FTSE100 up 8.5%. The correction is clearly positive for bond markets, but it would take a real souring of equity sentiment to see a range break on US 10yr that takes the yield below 2.30% support.

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