FX Market Update 29-3

Market Briefs

  • EUR/USD -0.2%, USD/JPY -0.2%, GBP/USD -0.2%, DXY +0.1%
  • DAX +0.4%, CAC +0.1%, FTSE flat, Brent +0.7%, Gold +0.1%
  • Dollar index pulls away from 4-1/2-month lows to 99,953
  • GBP/USD reverses early losses, lifts to 1.2460
  • Oil rises on Libya disruption, likely extension to OPEC output cut – Rtrs
  • British PM May to fire starting gun on Brexit – Rtrs
  • GB Feb BOE Consumer credit 1.441bln vs prev 1.609 rvsd. 1.300bln f/c
  • GB Feb Mortgage lending 3.489bln vs prev 3.226 rvsd. 3.450bln f/c
  • GB Feb Mortgage approvals 68.315k vs prev 69.114k rvsd. 69.900k f/c
  • GB Feb M4 money supply -0.3% vs prev 0.9%
  • DE Feb Import prices 0.7% m/m, 7.4% y/y vs prev 0.9%/6.0%. 0.3%/7.0% f/c
  • CH Mar Investor sentiment 29.6 vs prev 19.4
  • CH Feb UBS Consumption indicator 1.50 vs prev 1.44
  • FR Fabius says Trump’s move on Obama-era climate policies is backward step – Rtrs
  • No one wants lines of trucks at borders after Brexit – Hammond – Rtrs
  • French ex-PM Valls says will vote for Macron in election – Rtrs


Looking Ahead – Economic Data (GMT)

  • 12:00  MBA Weekly Mortgage Application Indices
  • 15:00  Pending Home Sales Index (Feb) (mkt 108.5, +2.0% m/m; prev 106.4, -2.8% m/m)
  • 15:30  EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

  • 14:20  FRB Chicago’s Evans at international capital markets conf; Frankfurt, Germany
  • 16:30  FRB Boston’s Rosengren on economic outlook; Boston, MA
  • 18:15  FRB San Francisco’s Williams presents at Forecasters Club of New York; NY

Currency Summaries
EUR/USD

  • EUR/USD edges a little lower to 1.0777 in Europe
  • Asia range 1.0797-1.0825. Europe’s sellers heed 200-HMA @ 1.0802
  • Trade over but close back below 200-DMA (1.0877) proved influential
  • Less heat from bond markets also leading EUR/USD a little lower
  • Large spec longs also key:
  • May see move to neutral ground, 21-DMA 1.0691 near mid March range

USD/JPY

  • USD/JPY dips back below 111.00 to hit 110.92 after falling from 111.31 peak
  • Talk of solid bids below @110.50, large from 110.30
  • Japanese official pension funds, life insurers have bids from @110.50
  • Upside limited, 111.39 weekly cloud top weighs
  • Eventual falls to test 110.00 barriers remain on the cards as stale longs remain
  • Significant 30/60-day log correlations with UST/JGB spreads across the curve

USD/CHF

  • USD/CHF a little higher in line with broader dollar adjustment
  • Supported also by positive techs. Tuesday close on 200-DMA bullish
  • 0.9920-45 range. 0.9950 38.2% Fibo Mar 1.0170-0.9814. 0.9914 Asia low
  • UR/CHF sellers persistent close to 1.07. 1.0733/11 range
  • SNB committed to new soft floor at 1.07 (closes above since Mar 8)

GBP/USD

  • GBP/USD topped out a pip shy of 1.2461 (Mar 23 low) after rallying off 1.2377
  • 1.2377 = 8-day low in Asia. May’s A50 letter will be delivered to Tusk at 7.30am ET
  • Receipt of letter will set two-year Brexit negotiations clock ticking
  • EUR/GBP retreated to a European am low of 0.8657 from 0.8735 (12-day Asia high)

USD/CAD

  • USD/CAD fell from 1.3401 to threaten 1.3355 (Tuesday low) during the European am
  • Decline influenced by higher oil prices: WTI 48.65/barrel at 6.15am ET, 30 cents higher on day

AUD/USD

  • AUD/USD ran into resistance circa 0.7663 after rising from 0.7633 (European am low)
  • 0.7663 = 200HMA. More offers expected pre-0.77. Dalian iron ore closed up 3.5% Tuesday
  • AUD/NZD was helped to 8-day high of 1.0927 in Asia by profit-taking on shorts

NZD/USD

  • NZD/USD elicited fresh support under 0.7000 during the European am
  • 0.6993 = early Europe low. 0.6999 = Asia low. 0.6994 was last Friday’s low

FX OPTIONS

  • USD/JPY vols well off Mon’s highs amid spot recovery, tho losses stall for now
  • Cross/JPY vols gave back most of Mon’s gains yesterday and stay heavy
  • EUR/USD vols trading sideways – front end underpinned by French election risk
  • Cable vols opened higher amid GBP slide but supply returning
  • AUD/USD and CAD vols closer to recent/2yr lows as ranges hold

COMMENT
Brexit – Don’t feed the GBP bears, not yet anyway

Compared to the close yesterday GBP is down some 0.5% vs the USD. The focus on GBP is understandable given that it is a day in which the UK will trigger Article 50 and start the negotiating process on exiting the EU. However, it is worth keeping in mind that the exaggerated nature of the headlines connecting GBP to Article 50/Brexit. For today at least the weakness of GBP against the USD is related to a broad-based rally on the USD that has impacted both DM and EM FX. A chart
is worth a thousand words so to highlight the broad nature of the USD rally

While the price action today is related to the USD over the next few months we still look for GBP to weaken below 1.20. Brexit negotiations are likely to bring a lot of uncertainty and challenges that will raise expectations of “no deal” before a compromise is reached. The clouds of uncertainty are likely to make funding what is still a large current account deficit tricky. In addition, we also have the potential for divergence between the Fed and BoE policy, and that is likely to see rate differentials widen in favour of a lower GBP/USD.

A near/short-term hurdle to a lower GBP is positioning, with IMM data showing hefty net speculative short positions that are at a record high. These net shorts have recently been more of a function of GBP longs reducing their exposure as well as an increase in GBP short positions. It will likely need a flushing out of these GBP shorts and a higher GBP/USD (close to 1.30) before GBP/USD can move below 1.20.

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