FX Market Update 18-5

Market Briefs

• EUR/USD -0.35%, USD/JPY -0.42%, GBP/USD +0.55%, EUR/GBP -0.88%
• DXY flat, DAX -1.06%, FTSE -1.46, Copper -1.9%
• UK shoppers shrug off inflation pressure; +2.3% vs revsd -1.2% prev -1.8%
• GB Apr Retail sales yy +4.0% vs revsd +2.0% prev 1.7%
• Trump campaign had at least 18 undisclosed contacts with Russians
• Bank of England’s growth and pay forecasts too optimistic-poll
• ECB to signal a move away from QE by Sept on better data-poll
• Japan’s economy expands at fastest pace in a year in Jan-March
• Support for Macron’s party grows before French parliamentary election-poll
• EU looks to build alternative to London for capital market – document
• Smaller cities keep China property market hot in April
• Greece needs to clear more hurdles before ECB bond buys: Coeure
• Oil down as market stays well supplied despite OPEC cuts; Brent -1.88%
• Mexico central bank seen holding key rate, pointing to future hikes

Looking Ahead – Economic Data (GMT)

12:30 Initial Jobless Claims (May 13 week) (prev 236k)
12:30 — Continued Claims (May 6 week) (prev 1.918 mn)
12:30 Philadelphia Fed Manufacturing Survey (May) (mkt +19.8, prev +22.0)
14:00 Leading Indicators (Apr) (mkt +0.4% m/m, prev +0.4% m/m)

Looking Ahead – Events, Other Releases (GMT)

15:45 FedTrade Operation 30-year Fannie Mae / Freddie Mac (max $1.625 bn)
17:15 FRB Cleveland’s Mester (non-voter, hawk) on the economy and monetary policy; Minneapolis, MN

Currency Summaries
EUR/USD

• EUR/USD 1.1174 in Asia hits 1.1107 low In Europe
• EUR/GBP selling behind initial pressure (UK data, cable 1.30 break)
• EUR/JPY then slammed 123.70-122.59 on latest US news
• Expect EUR/USD buyers between May 16 1.1097 high & May 17 1.1080 low
• Key supports @ May 8 high 1.1024, 100-HMA 1.1022 and 1.1000
• Rates have turned fav EUR/USD bounce: US/bund May 18

USD/JPY

• USD/JPY continues to drop, today falling from 111.24 to 110.31
• Narrower UST-JGB spread corresponds with weaker USD/JPY
• Spot has taken out the 110.52 Fibo
• 110.52 – 61.8% retrace of the 108.13 to 114.38 rise
• Bulls rout persists as Trump woes weigh on risk
• Stops, which were layered below 110.50, have been triggered
• Price action sets up test of 110.00
• Daily cloud, 111.14-112.12, weighs
• BoJ DepGov Iwata– Nothing on exit from policy, depends on rates at time
• EconMin Ishihara – Economy recovering but no clean escape from deflation
• Japan Q1 GDP +0.5% q/q, +2.2% AR, +0.4/+1.7% eyed
• MoF flow data May 13 week – Japanese good buyers of foreign bonds again
• MoF flow data – Foreign investors add to Japan portfolios

EUR/CHF

• Renewed CHF strength looks to test Wed’s 0.9774 6-mth high vs USD
• USD/CHF 0.9822-0.9783 Europe. Wed close under 61.8% of Trump rally 0.9853
• 76.4% Fibo is next support at 0.9737
• CHF has gained in recent days amid Trump concerns
• The slide in EUR/CHF Wed stopped bang on the 50% of May rise at 1.0890
• Speculation that the SNB remains active despite a softer CHF recently
• 1.0929-1.0893 today. 61.8% Fibo next level of support at 1.0867
• SNB to keep expansive monetary policy – Jordan in paper

GBP/USD

• Cable finally vaulted 1.30 after big UK retail sales data beat at 0830GMT
• UK retail sales +2.3% in Apr vs +1.0% consensus expectation
• 1.3046 = 8mth high for cable after stops above 1.3000 tripped
• 1.2987 was pre-data release high vs 1.2937 early Ldn low
• EUR/GBP down to 0.8541 courtesy of UK retail sales data beat
• 0.8530 is former resistance turned support, high after Macron 1st round win

USD/CAD

• 1.3650 offers capped USD/CAD after it vaulted 1.3641 (Wednesday’s high)
• Option-related interest suspected in mix: large 1.3650 expiry Friday
• USD 600mn strike. More offers tipped at 1.3660 (1.3659 = Tuesday’s high)
• 1.3619 (Asia top) is now support. Key support 1.3576, 38.2% of 1.3224-1.3793
• 1.3576 approximates to Tuesday/Wednesday low. 1.3582 = Asia low
• BoC meets next week (May 24), expected to keep key interest rate at 0.5%

AUD/USD

• AUD/USD retreated to 0.7433 during European am vs 0.7468 Asia 15-day top
• Retreat influenced by decline in risk appetite: S&P e-minis -0.14% 0915GMT
• S&P 500 closed -1.82% Wednesday. 0.7409 = Asia low, pre-Oz jobs data

NZD/USD

• NZD/USD retreat to 0.6915 influenced by a decline in risk appetite
• S&P e-minis -0.39% at 0948GMT. S&P 500 closed down 1.82% Wednesday
• 0.6952 = 1wk high for NZD/USD in Asia (0.6951 was last week’s high)

FX OPTIONS

• USD/JPY vols and risk reversals poised for deeper spot weakness
• EUR/USD vols peak with spot but remain well above recent/long term lows
• Cable gamma paid as expected when 1.30 barriers breached, vols propped
• AUD vols tick higher despite firmer spot – value levels at recent/2yr lows

COMMENT

GBP/USD through 1.30, next stop 1.35

The announcement of an early election last month helped Cable break through 1.2780/00 and, since then, a soft dollar environment and strong UK retail sales has helped the unit break above 1.30 where previously a move above this level had been thwarted by importer hedging related demand.
A move to 1.35 over the next 2-months seems likely now especially as EUR/USD has also managed to break firmly above 1.10. The dollar is softer against a large majority of both DM and EM currencies this year despite a Fed that surprised in March and likely to hike again in June. The backdrop of rate differentials has not helped dollar bulls and what we are still seeing is an unwinding of short dollar positions.
But it’s not just about the dollar, a reduction in bearishness toward the GBP (and EUR) has also been eroded due to optimism over a longer transition period (no election in 2020) and better eurozone data (especially the soft data). It seems likely that we could go back to the upper end of the 1.28-1.35 trading range that was seen last year following the June EU referendum and ahead of the October flash crash.
The pain trade currently is still in the direction of GBP shorts re-evaluating their bearish views. Selling from importers is likely to help make upside less of a one-way bet.

CHART

Weekly cloud top potential for cable

GBP/USD looks to be building for a test of the top of the weekly cloud at 1.3356 as it rises further into the cloud after breaking 1.300. A retracement of the 2016 May to October drop is underway. The 38.2% Fibo of that fall was broken at 1.2840 in April and long players are now targeting the next retracement level, the 50% Fibo, at 1.3257. Daily slow stochastics have risen from oversold levels and show room to run, the upper 30-day Bollinger is closer to the market resistance at 1.3165. Note that Bollinger bands historically contain price action so could see an adjustment lower ahead of a fresh run north. Those looking to enter long GBP trades should use any pullbacks as an opportunity to join the trend. The 10- and 21-DMAs are near-term supports at 1.2938 and 1.2902, respectively.

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