FX Market Update 26-6

Market Briefs

• EUR/USD -0.11%, USD/JPY +0.37%, GBP/USD +0.02%, EUR/GBP -0.15%
• DXY +0.15%, DAX +0.76%, FTSE +0.70%, Brent +0.59%, Gold -1.23%
• UK PM May strikes deal to get Northern Irish DUP support for minority govt
• German shoppers drive business morale to ‘jubilant’ record high
• DE Jun Ifo Business Climate, 115.1 vs f’cast 114.5, prev 114.6
• DE Jun Ifo Current Conditions, 124.1 vs f’cast 123.3, prev 123.2 revsd 123.3
• DE jun Ifo Expectations, 1-6.8 vs f’cast 106.4, last 106.5
• UK consumer lending growth in May slowest since 2015 – BBA
• Fed’s Williams sees gradual rate hikes as key to further U.S. growth
• Japanese airbag maker Takata files for bankruptcy, gets U.S. sponsor
• U.S. home lenders see leaner times ahead -Fannie Mae survey
• Gold slips, market cautious ahead of U.S. data this week
• Oil rises 1 pct on weaker dollar, but U.S. drilling drags
• China’s bank regulator cracks down on graft in deposit-raising
• Trump, Modi seek rapport despite friction on trade, immigration
• BoJ PB June 15-16 Min: Optimistic on econ but CPI lagging, even-keel good
• BoJ Min: Premature to talk about exit at this time
• Japan May corporate service price index -0.1% m/m, +0.7% y/y to 103.7

Looking Ahead – Economic Data (GMT)

• N/A US Atlanta Fed GDPNow (Q2) (prev +2.9% q/q AR)
12:30 US Revised Building Permits (May) (as reported 1.250 mn SAAR)
12:30 US Durable Goods Orders (May) (mkt -0.6% m/m, prev -0.8% m/m)
12:30 US Durable Goods Orders ex-Transportation (May) (mkt +0.5% m/m, prev -0.5% m/m)
12:30 US Durable Goods Orders ex-Defense (May) (prev -0.9% m/m)
12:30 US Core Capital Goods Orders (May) (mkt +0.3% m/m, prev +0.1% m/m)
12:30 US Chicago Fed National Activity Index (May) (prev 0.49)
14:30 US Dallas Fed Texas Manufacturing Outlook Survey (Jun) (prev 17.2)

Looking Ahead – Events, Other Releases (GMT)

15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac securities (max $1.35 bn)
19:00 NY Fed publishes tentative schedule of FedTrade Agency MBS operations

Currency Summaries

EUR/USD

• EUR/USD lower 1.1208 to 1.1182 after news IFO at record high
• Sign long liquidation is dominating activity:
• Close over 21-DMA @ 1.1202 is needed to reinvigorate bulls
• Bullish view likely to hold while trade above May 30 low at 1.1110
• Low vols are a growing risk for EUR longs:

 
• Euro’s use to fund carry trades is likely to grow

USD/JPY

• USD/JPY makes recovery moves, thin 111.78-82 cloud vulnerable
• Has made gains from 111.13 to hit 111.71 as bulls try to take initiative
• Intra-day bulls need to force an hourly close above 111.71 pivot
• 30/60-day correlation strong across across UST/JGB curve
• 10’s & 5’s have particularly strong relationships with USD/JPY

EUR/CHF

• EUR/CHF sideways biased cloud hints at tighter range trading near-term
• Early Monday action sees a bid tone and high of 1.0864
• Cloud base was threatened last week but mkt turned just ahead of 1.0823
• Cloud top the challenge & comes @ 1.0876: Chart: forex
• Latest SNB depo data smacks of cross supp: reserve data too
• Swiss reserves: Chart:
• SNB continues to nurse domestic inflation by taming the Franc

GBP/USD

• Half-cent cable fall since 1.2758 tested in early European trade
• 1.2758 was June 20 high (before dovish Carney steer hurt GBP)
• 1.2755 = Asia high. 1.2745 = Friday’s high (1.2705 = ensuing pullback low)
• 1.2700 & 1.2760 option expiries for NY cut, GBP 324mn & 321mn strikes
• Tory/DUP deal may be very near: MPs vote on Queen’s Speech Thursday
• BoE to publish semi-annual Financial Stability Report Tuesday 0930GMT

USD/CAD

• USD/CAD fell to an intra-day low of 1.3232 ahead of the NY open
• 1.3254-1.3277 was Asia range. 1.3308 = Friday’s high on soft Canada CPI
• Near half-yard 1.3250 option expiry Tuesday
• 27% chance of BoC rate hike July 12-BOCWATCH on Eikon

AUD/USD

• AUD/USD met fresh headwind pre-0.76 during the European am
• 0.7590 = high before gold price tanked (stops sub-USD 1,250/oz tripped)
• Near half-yard 0.7600 option expiry Tuesday. 0.7580-86 = June 21-23 highs

NZD/USD

• NZD/USD fell to 0.7262 after meeting fresh headwind pre-0.73 early Europe
• 0.7290 = intra-day high. 0.7297 was Friday’s high. 0.7298 = June 19 high
• IMM net NZD long soared to 21,455 contracts in week to June 20 from 1,595

FX OPTIONS

• G10 vols suffer amid range bound spot/low realised in to summer lull
• Many curves at long term lows – EUR/USD 2.5yr lows, USD/JPY 18mth lows
• EUR/USD gamma positioning starting to lighten after recent size expiries
• 1mth Cable vol has more downside potential, 1yr bid over Brexit uncertainty
• 1mth CAD vol slow to ease, focus on next BoC after recent hawkish comments

COMMENT

SNB aftershocks reverberate in wider FX markets

The aftershocks of SNB intervention are apparent in wider FX. May saw the Swiss FX reserve fall for the first time this year, and on May 12, EUR/CHF topped at 1.0987 before slipping to 1.0833. The currencies the Swiss c.bank buys when rebalancing all fared well in the period after the SNB stopped buying EUR/CHF. EUR/USD defied very bullish markets, failing to reach a 1.1300 target that was inches away. The USD is 35% of Switzerland’s FX reserve while the JPY makes up 8% of reserves. EUR/JPY fell 125.80-122.40 mid-May and has been top heavy since. GBP, which represents 7% of reserves, has been surprisingly resilient in the face of adversity. EUR/GBP initially top heavy from around 0.8750 early June and 0.8850 more recently, with both moves going against expectation. CAD is just 3% of the reserve but EUR/CAD was toppy in May and fell around 3% this month, hurting specs who had built one of the largest CAD shorts on record.

CHART

EUR/USD bulls need to overcome tenkan

EUR/USD found support just below 1.1121/25 – 38.2% retrace of the 1.0839 to 1.1296 up-leg/23.6% of 1.0570-1.1296 gain – at 1.1119 on June 19. The subsequent recovery has left bulls grappling with the tenkan line which is currently at 1.1208. A break and daily close above here will accelerate a move towards the 2017 1.1296 peak. Tenkan and kijun lines remain positively aligned, reinforcing the overall upside bias. Conversely, the long upper shadow on the June 14 candlestick line continues to weigh on the market, so although the picture looks bullish overall, we urge an element of caution. If there is sustained trading back below the 1.1121/25 region then the underlying market outlook will likely shift to the downside

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