FX Market Update 16-5

Market Briefs

• EUR/USD +0.65%, USD/JPY -0.22%, GBP/USD -0.06%, EUR/GBP +0.76%
• DXY -0.36%, DAX -0.09%, FTSE +0.54%, Gold +0.35%, Copper -0.57%
• Euro hits six-month high, its highest level since Nov 9 2016 in Europe at 1.1049
• Kuroda says “quite sure” BOJ can smoothly withdraw stimulus
• JP PM: will continue to deploy fiscal monetary/structural steps for econ revival
• Oil rises on expectations of extended supply curbs; Brent +0.41%
• Euro zone expands trade surplus despite protectionist calls
• EZ Mar Eurostat Trade NSA 30.9b vs prev 17.8b
• EZ Q1 GDP Flash estimate qq 0.5% vs prev 0.5%
• EZ Q1 GDP Flash estimate yy 1.7% vs prev 1.7%
• German investor morale rises as economy “in good shape”
• DE May ZEW Economic sentiment 20.6 vs prev 19.5
• DE May ZEW Current conditions 83.9 vs prev 80.1
• UK inflation jumps more than expected in April to hit highest since 2013
• GB Apr Core CPI yy +2.4% vs prev 1.8%
• GB Apr CPI yy +2.7% vs prev 2.3%
• GB Apr RPI yy +3.5% vs prev 3.1%
• GB Apr PPI Core output yy NSA +2.8% vs prev 2.5%
• Norway Q1 mainland GDP 0.6% vs rvsd 0.4% prev, 0.5% exp
• Riksbank proposes switch to CPIF and +/- 1.0% around 2.0% inflation target

Looking Ahead – Economic Data (GMT)

12:30 Housing Starts (Apr) (mkt 1.260 mn, prev 1.215 mn)
12:30 — Building Permits (Apr) (mkt 1.270 mn, prev 1.267 mn)
12:55 Redbook Weekly Same-Store Sales Index
13:15 Industrial Production (Apr) (mkt +0.3% m/m, prev +0.5% m/m)
13:15 — Capacity Utilization (Apr) (mkt 76.3%, prev 76.1%)
13:15 — Factory Output (Apr) (mkt +0.3% m/m, prev -0.4% m/m)

Looking Ahead – Events, Other Releases (GMT)
18:30 FedTrade Operation 30-year Fannie Mae / Freddie Mac (max $1.625 bn)

Currency Summaries

• Suggests 1.1050 barrier. Few vanilla options 1.11+:
• Buying mainly led by optimism for the EZ after favourable elections
• Rates markets are supporting EUR/USD too but with bonds lagging/tracking FX
• Germany’s ZEW missed a 22 f/c but at 20.6 in May is best since Aug 2015


• 2.2 yards of 114.00 option strikes set to expire on Thurs which may draw
• There are said to be good sized offers towards 114.00
• Decent amount of bids near 113.00, 100-DMA props just below
• 30/60-day correlated UST-JGB yield spread across the curve
• Recent narrowing of yield spread has weighed on spot in recent days
• Reports Japanese players bought US Treasuries on yield uptick last week
• USD/JPY trades a modest 113.25-113.79 range so far this session
• EUR/JPY bias for 125.68 pivot point, then 126.00 beyond
• Cross cleared stops above 125.00, rising from 124.60 to 125.54


• USD/CHF pullback extends through 61.8% Fibo of May rise at 0.9954
• Broad based dollar weakness weighs. DXY -0.4% Tues, off 5% fm Jan peak
• Spot tests 0.9922 low, risk for full retracement to the May 5 0.9859 base
• Weekly cloud twist by 0.9870 helping pull price lower
• EUR/CHF stays steady, supported by EUR/USD rise above 1.10
• Cross lifts to 1.0958 then eases to 1.0941 ahead of NY
• Retracement risk remains. 38.2% Fibo of the May rise is at 1.0913


• EUR/USD moves initially inspires GBP/USD buying
• Pair rises 30-40 pips from around 1.2900 in advance UK inflation data
• CPI highest since Sept 2013 @ 2.7% beating estimates
• GBP/USD 1.2958 on data release then surprisingly lower to 1.2875
• 21-DMA @ 1.2882 pivotal (close basis). Data move suggest traders long GBP
• 1.3000 barriers remain key above


• Oil rallied strongly y/day after Saudi/Russia oil output cut talk, boosted CAD
• USD/CAD fell 1.3720-1.3601 Monday but recovers 1.3659 today
• Oil off its highs and CAD consolidates. Didn’t close below 21DMA 1.3623
• Focus remains OPEC 25-26 May – keeps bid under 2wk vol 7.5/160 pips
• 1mth vol 7.3 (6.1 to 7.45 spike after 1.3600-1.3790 rally late Apr/early May)


• AUD 0.7406-35 in Asia. Resistance Mon 0.7446 peak, 21DMA 0.7461
• Highs seen after RBA mins, little changed from April. Lows after AUD/JPY sales
• Bids touted around 0.7400, dip to 0.7398 early London. Offers 0.7450
• China announcment one belt road project props commods/AUD [nL4N1IH4TW]
• Support may prove fleeting, AUD/commods could come back under pressure
• 10DMA 0.7393 initial support before Mon’s 0.7386/Fri’s 0.7369 lows
• Implied vols l/term lows, risk rev low end of post US election 2.0-0.6 AUD puts


• Opened Asia at 0.6879, traded 0.6876/0.6906 range
• Some weight on commods early London – NZD 0.6865
• Risk trades undone as JPY demand renewed steering NZD/JPY cross lower o/n
• Speculation safe haven JPY bid linked to latest White House news [nL2N1IH1O9]
• Relative NZD outperformance vs AUD saw cross off 0.4% to 1.0747
• GDT auction perennial wildcard for kiwi & cross as WMP futures price lower


• EUR short covering lifts vols/EUR calls as EUR gains today
• Huge 1.10 EUR/USD expiry Thursday a potential draw on setbacks
• 1mth vol gets ECB, FOMC, UK MPC to underpin related vols
• USD/JPY in a long gamma zone to cap vol demand there for now
• AUD/USD vols back near recent/2yr lows – potential value, AUD puts cheap


Riksbank proposals open up dovish/hawkish debate

Sweden’s c.bank has proposed the reintroduction of an inflation tolerance band and a move to core inflation (CPIF) from headline CPI, prompting questions whether the Riksbank is moving to a more dovish or hawkish bias. The difficulty of managing both inflation and inflation expectations has led to the new approach. Although the measures will likely reduce the need for further stimulus, there is also the view that the Riksbank will tolerate inflation moves below the 2.0% target by introducing the +/- tolerance band. The Riksbank’s main aim will be to anchor inflation expectations rather than change monetary policy. For, now the market has taken the proposals as dovish, pushing EUR/SEK to a five-month high of 9.7480. Link to Riksbank press release


Euro aims for 126.99 Fibo vs yen

Euro has managed to clear the 124.77 Fibonacci level – 38.2% retrace of the 149.79 to 109.30 (December 2014 to June 2016) fall – but needs to sustain this break until the end of May when it has a chance to register a critical monthly close above. Monday’s long white candlestick line adds to the underlying bullish market structure, increasing the odds that 126.99 – 76.4% retrace of the 132.45 to 109.30 fall – will be tested in coming sessions. Tenkan points north are reinforcing near-term positive momentum in the market. While longer-term 14-month momentum remains marginally negative, the chance is growing for this indicator to flip to positive readings for the first time since December 2014. A failure to register a monthly close above the 124.77 level will weigh on bulls in coming months


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