FX Market Update 27-6

Market Briefs

• EUR/USD +0.59%, USD/JPY -0.07%, GBP/USD +0.11%, EUR/GBP +0.46%
• DXY -0.43%, DAX -0.41%, FTSE -0.01%, Brent +0.94%, Gold +0.50%
• ECB needs to keep policy adjustment gradual: Draghi
• Fed’s Williams sees advanced economies stuck in low growth mode
• Ladbrokes/Paddy Power-Hammond new favourite to be next Tory leader
• UK retail sales recover from fall, but July seen tough – CBI
• GB Jun CBI Distributive Trades, 12 vs f’cast 2, prev 2
• Bank of England raises UK banks’ capital requirements by 11.4 bln stg
• Swiss call time out in push on EU ties as Brexit talks begin
• U.S. Republican leaders work to buoy Senate healthcare bill
• Oil up on weaker dollar, supply glut caps gain
• Gold rebounds from 6-wk low as dollar sags ahead of Yellen speech
• China industrial profits quicken in May, seen fading as finance costs rise

Looking Ahead – Economic Data (GMT)

12:55 US Redbook Same-Store Sales Index (weekly) (prev +2.8% y/y)
13:00 US S&P CoreLogic Case-Shiller (Apr) (mkt +5.9% y/y, prev +5.9% y/y)
14:00 US Consumer Confidence (Jun) (mkt 116.0, prev 117.9)
14:00 US Richmond Fed Manufacturing Composite Index (Jun) (prev 1)
14:00 US Richmond Fed Services Index (Jun) (prev 34)
14:30 US Dallas Fed Texas Service Sector Outlook Survey (Jun) (prev 7.7)
14:30 US Dallas Fed Texas Service Revenues Index (Jun) (prev 15.9)

Looking Ahead – Events, Other Releases (GMT)

15:15 Fed’s Harker speaks on the economic outlook and international trade
17:00 Fed Chair Yellen takes part in Q&A on “global economic issues”
21:30 Fed’s Minneapolis’s Kashkari participates in town hall discussion

Currency Summaries

EUR/USD

• Latest from ECB’s Draghi sends EUR/USD up
• ECB chief says reflationary forces have replaced deflationary ones
• EUR/USD 1.1183-1.1265 in reaction despite promise to maintain stimulus
• Fed’s Williams also downbeat on growth just after a rate hike
• Heavy real money supply expected ahead 1.1300, then stops over
• EUR/JPY @ 120.805 1 pip shy 2017 peak as funding choices shuffled

USD/JPY

• USD/JPY bulls are grappling with the daily cloud which spans 111.66-83
• Stops likely clustered above 112.25 – 61.8% of 114.38-108.81 fall
• Japanese exporter selling curtailed gains much above 112.00
• Market subsequently relapsed from 112.07 to 111.47, before stabilising
• Watch out for 111.60 strike expiring on Wed currently worth 1.9bn
• EUR/JPY boosted by ECB Draghi comments. 124.75-125.80
• JPY likely to remain weak due to role as funding currency for carry trades
• Low vol & buoyant risk assets encouraging carry trade in northern summer

EUR/CHF

• EUR/CHF softer on the day (1.0895-1.0869) but bullish hope revived on techs
• Cloud top in focus at 1.0878 after rebound from its base last week
• Close above cloud targets post Brexit hurdles by 1.10. Reached 1.0987 in May
• USD/CHF took a knock after Draghi & EUR rise
• Sharp 0.9731-0.9660 drop, its lowest level since May 14
• 0.9650 is the 76.4% Fibo of Jun’s 0.9614-0.9770 rise and next support

GBP/USD

• 1.2773 = knee-jerk cable high after BoE FSR published at 0930GMT
• BoE raises UK banks’ capital requirements by GBP 11.4bln
• 1.2755 was pre-BoE FSR high vs 1.2718 early Ldn low pre-Draghi
• EUR/GBP up to 0.8835 after Draghi speech, sub-0.88 pre-Draghi
• 0.8866 = recent 7mth high (0.8720 = subsequent low)

USD/CAD

• USD/CAD fell from 1.3260 to a low of 1.3221 during the European am
• Drop influenced by carry trade-related demand for CAD & modest oil rise
• WTI 43.75/barrel at 1000GMT vs 10mth low of 42.05 last week (June 21)
• USD/CAD bids tipped pre-1.3200 (1.3208-13 = recent treble-day low)

AUD/USD

• AUD/USD extended north to 1wk peak pip shy of 0.7625 during European am
• 0.7625 was June 20 high. Carry trade-related demand for AUD aided rise
• Dalian iron ore closed up 5.92% Tuesday, AUD-positive
• 0.7604 = Asia high. 0.7600-05 option expiries for NY cut, AUD 532mn strikes

NZD/USD

• NZD/USD extended north to a 20wk peak of 0.7344 during European am
• Carry trade-related demand for NZD aided rise. 0.7299 = low since 0.7344

FX OPTIONS

• Draghi comments boost EUR. EUR/USD could threaten 1.1300 barriers
• Vols off their very low base and 1mth risk reversals better bid EUR calls
• USD/JPY vols finding support at new 18mth lows. Big 111.60 expiry Wed’s
• Cable and EUR/GBP vols steay heavy. AUD 1mth support at 2.5yr low
• CNH vols off lows amid big intraday spot slide – 1mth 3.5 from 3.0

COMMENT

Euro has substantial room to rise on upbeat Draghi

Today’s upbeat comments from ECB’s Draghi should open substantial topside potential for the euro. EUR/USD traders were rewarded for betting markets hold onto the low for long U.S. rate view. They are likely to profit from a surge in betting on a reduction in ECB stimulus. The ECB keeps telling markets it needs to maintain stimulus while acknowledging improving growth. However, reflationary forces have now replaced deflationary ones and this is fuel for EUR/USD traders who have spent a couple of weeks reducing long positions. Long liquidation has seen option vols drop to multi-year lows, encouraging some to fund carry trades with euros. Those short euro positions will feel the full force of Draghi’s comments and prior frustrations of a bullish market will likely result in a 1.1300 break. The mid-term range focus may shift to 1.10-1.15 from 1.08-1.13 ahead of September c.bank meetings. Other vols may stay low and a switch in funding choices should underpin EUR/JPY and EUR/CHF.

CHART

Increasing bullish signals for EUR/CHF

EUR/CHF sentiment has turned and the cloud top is now in focus at 1.0878. The cross dropped to threaten the base of the cloud last week but the market rebounded just ahead of it. In addition, its failure to close under the 55-DMA increased expectations of further gains. EUR/CHF struggled near post-Brexit hurdles by 1.10 and the 1.1010 Brexit week high back in May but a close above the cloud could open the path for another assault on that region. The upper 30-day Bollinger at 1.0935 and the May 12 1.0987 high are resistance levels ahead of the figure. Note also that the 100-DMA has crossed positively over the 200-day which is a buy signal and reinforces the upside bias

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