FX Market Update 29-6

Market Briefs

• EUR/USD +0.25%, USD/JPY +0.17%, GBP/USD +0.28, EUR/GBP -0.03%
• DXY -0.15%, DAX -0.33%, FTSE +0.27%, Brent 0.44%, Gold -0.20%
• German consumer morale at highest level since Oct. 2001 heading into July
• DE Jul GfK Consumer Sentiment, +10.6 vs f’cast +10.4, last +10.4
• Euro zone economic sentiment jumps in June to almost 10-yr high
• EZ Jun Business Climate, +1.15 vs f’cast +0.94, last +0.90
• EZ Jun Industrial Sentiment, +111.1 vs f’cast +109.5, last +109.2
• EZ Jun Services Sentiment, +13.4 vs f’cast +12.9, last +13.0
• British PM May faces vote test in parliament over government plan
• UK mortgage approvals and consumer lending accelerate unexpectedly in May
• GB May Mortgage Lending, 3.5 bln vs f’cast 2.60 bln, last 2.7 bln revsd 2.8 bln
• GB May Mortgage Approvals, 65.2k vs f’cast 64.0k, last 64.6k revsd 65.0k
• UK regulator reviews business models at retail banks
• Greece says can return to bond markets even without ECB
• Oil prices rise to two-week high on dip in U.S. output
• China factory activity seen cooling in June, crackdown on debt risks drag
• MoF flow data wk-ended 6/24: Japanese light buyers of foreign bonds, stocks
• MoF flow data: Foreigners sell net Y1.46 trln JGBs
• Japan May retail sales -1.6% m/m, +2.0% y/y, +2.6% y/y eyed, Apr +1.4%, +3.2%
• BoJ Harada: BOJ could cut ETF buying if inflation nears 2 pct

Looking Ahead – Economic Data (GMT)

• 12:30 US Initial Jobless Claims (Jun 24 wk) (mkt 240k, prev 241k)
• 12:30 US Continued Claims (Jun 17 wk) (mkt 1.940 mn, prev 1.944 mn)
• 12:30 US Real GDP (final Q1) (mkt +1.2% q/q AR, prev +1.2% q/q AR)
• 12:30 US Real Final Sales (final Q1) (mkt +2.2% q/q AR, prev +2.2% q/q AR)
• 12:30 US Core PCE Deflator (final Q1) (mkt +2.1% q/q AR, prev +2.1% q/q AR)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade Operation 30-Year Ginnie Mae (max $1.05 bn)
• 17:00 Fed’s Bullard on the economy and monetary policy

Currency Summaries

EUR/USD

• Data and interest rates support a EUR/USD rise to 1.1435
• Slowing pace of gains evidence of the greater number of spec longs
• Most German states report a small rise in YY CPI
• German engineering order surge supported by foreign demand
• EUR/USD trades its highest since June 2016 but falls shy 1.1450 options
• Focus flips to final US GDP, PCE and initial claims data
• 10 year US yields up 12bp in 2 days ahead the data releases

USD/JPY

• USD/JPY is through 112.50 which was a tough level to crack
• 113.00 is unmasked with stops said to be clustered above
• 113.40 – 50% retrace of the 118.66 to 108.13 fall – beckons
• Widening UST-JGB spreads corresponds with USD/JPY gains

EUR/CHF

• EUR/CHF rises to its highest since May 22 on the back of EUR/USD rally
• 1.0950 next resistance, this is the 76.4% of the May-Jun 1.0987-1.0833 drop
• A little lower intraday but dips are eyed as buying opportunities
• Close above cloud & Kijun Wed reinforced the bullish bias on the charts
• Post-Brexit hurdles by 1.10 (1.1010 Brexit wk high) are now achievable
• USD/CHF’s 0.9562 low is nearing the 0.9550 spike low from November
• Then last June’s 0.9522 base. L-T trendline from there breached Wed

GBP/USD

• Cable scaled 5wk peak of 1.3007 on BoE Haldane’s latest steer (via BBC)
• Haldane: “Need to look seriously at the possibility of raising interest rates”
• GBP rallied sharply on hawkish Haldane shock last week (June 21)
• Offers pre-1.30 capped early Europe cable gains: 1.2977 was Asia high
• 1.3000 expiry for NY cut, GBP 336mn strike. Half-yard 1.3000 expiry Monday
• EUR/GBP 0.8800 expiry for NY cut, EUR 300mn strike

USD/CAD

• Bids ahead of 1.3000 based USD/CAD losses during the European am
• WTI rise to 15-day high of 45.24 was catalyst for drop to threaten 1.30
• 1.3021 was Asia low. Speculation some of the pre-1.30 bids option-related
• 1.3044 = high since 1.30 threatened. 1.3047 = rally high from 1.3014 Weds low
• BoC business outlook survey due Friday, may impact BoC hike expectations

AUD/USD

• AUD/USD extended north to 3mth high of 0.7680 during the European am
• Ascent influenced by higher commodity prices. 0.7635 was Asia low
• Offers tipped into 0.7700, may include option-related interest
• 0.77 expiry for NY cut, AUD 764mn strike. Half-yard 0.77 expiry Tuesday

NZD/USD

• AUD/NZD extended north to 9-day high of 1.0510 during the European am
• 1.0442 was Asia low. AUD gains influenced by higher commodity prices
• Cross rise has influenced NZD/USD retreat from 0.7325 to 0.7299
• 0.7254 was NZD/USD low Wednesday (0.7344 was Tuesday’s high)

FX OPTIONS

• EUR/USD vols stay firm, 1mth up over 1.5 vols since Tuesday
• 1mth EUR/USD risk reversals highest topside bias since 2009
• GBP/USD 1mth risk reversals lose downside bias, a rare occurance
• USD/JPY vol demand limited with spot still 2 JPY below May peak
• AUD vols paid. 1mth CAD remains sought pre BoC, 2.25 vols above lows

COMMENT

Cable risk reversals in rare flip for calls

Risk reversals highlight the implied vol premium for out-of-the-money calls versus puts in any given currency pair. This can give us an indication of how the options market is biased or positioned. A good example is today’s loss of the GBP put bias on 1mth Cable risk reversals. These traded to 2.0 from 0.2 vols ahead of the UK election, as the market was wary of GBP weakness, but quickly retraced to 0.5 as the pound stayed resilient. The contract is trading flat/neutral today and bid for GBP calls, an occurance only seen a handful of times in the last 10 years and highlights renewed GBP upside potential . Carney’s comments Wednesday, following hawkish Haldane last week, were the catalyst for this latest drop, as dealers bought GBP amid a rise in rate hike speculation. Mid-May highs at 1.3048 and barriers at 1.3100 remain hurdles for GBP bulls. Recall GBP was 1.3350 before BoE cut rates last August.

CHART

USD/JPY to grapple with 113.40 Fibo again

USD/JPY extends its recovery as it moves further above the weekly Ichimoku cloud which spans 109.52-110.35. The scope is growing for a more meaningful clearance of 113.40 – 50% retrace of the 118.66 to 108.13 (December 2016 to April 2017) fall. Once there is a weekly close above 113.40, the attention of the market will turn to May’s 114.38 peak and 114.64 – 61.8% retrace of the same 118.66 to 108.13 fall. Recall the market had a weekly failure above the 113.40 Fibonacci level in May which temporarily damaged the bullish structure. There is decent support around the weekly tenkan line, currently at 111.60, which could well underpin USD/JPY in coming months. The weekly cloud will thicken in the months ahead also, providing bulls with many future opportunities to find value on dips

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