FX Market Update 17-7

Market Briefs:

• EUR/USD -0.08%, USD/JPY -0.04%, GBP/USD -0.17%, EUR/GBP +0.16%
• DXY +0.05%, DAX -0.37%, FTSE +0.36%, Brent +0.29%, Gold +0.13%
• EZ Jun Inflation final y/y, 1.3% vs f’cast 1.3%, prev 1.3%
• EZ Jun Inflation excluding food and energy y/y, 1.2% vs f’cast 1.1%, prev 1.0%
• CN Q2 GDP y/y, 6.9% vs f’cast 6.8%, prev 6.9%
• As London squabbles, full Brexit talks start in Brussels
• S.Korea’s new government proposes military talks with N.Korea
• Oil edges above $49 on US drilling slowdown
• Gold inches up as prospects for slower U.S. rate hikes weigh on dollar

Looking Ahead – Economic Data (GMT)

• 12:30 US Empire State Manufacturing Index (Jul) (mkt 15.0, prev 19.8)
• 12:30 CA May Securities Cdns (C$), last -9.87 bln
• 12:30 CA May Securities Foreign (C$), last 10.60 bln

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.325 bn)

Currency Summaries

EUR/USD

 Tokyo holiday leads to a subdued European session
• EUR/USD 1.1435-63 after 1.1447-75 in Asia
• This week’s ECB meeting may lead to profitable long liquidation
• EUR longs largest since May 2011:
• Yet, while dips remain shallow most longs will hold
• Resistance @ 1.15 defined by options, techs bullish target 1.16/1.17

USD/JPY

• Session range has been a tight 112.40-77 so far
• Decent supply comes in @112.80 pivot point
• Japan day holiday leads to light trading
• Bears need to action a daily close sub 112.32 Fibo
• 112.32 – 50% of the same 108.81 to 114.49 rise
• Stops likely clustered below Friday’s 112.26 low
• NY Cut Expiries: 112.50 (660M), 113.00 (560M)
• Week’s Expires: Tue, 112.25 (850M). Thu, 113.00 (560M). Fri, 113.00 (1B)

EUR/CHF
• EUR/CHF lower, plays 1.1056-1.1026, in line with softer euro & euro/crosses
• 1.1016 & 1.0982 are 23.6% & 38.2% Fibos of June-Jul 1.0833-1.1073 rise
• EUR/CHF hit its best Fri in over a yr at 1.1073 without official intervention
• Fall in depo data continues to highlight that SNB has backed off intervention
• Domestic sight deposits 482.673bln w/e Jul 14 vs 486.024
• USD/CHF also trades at softer levels, 0.9657-0.9630 range

GBP/USD

• 1.3068 = low water-mark for cable since 1.3113 threatened in Asia
• 1.3113 was Friday’s 10mth high after GBP shorts were squeezed hard
• 1.3050 is now a support point (former key resistance level)
• 0.8765 = EUR/GBP high since 0.8744 threatened (0.8744 = Friday’s low)
• UK June inflation & retail sales data due this week (Tuesday/Thursday)
• CPI f/c +2.9%, as per May. Retail sales f/c +0.4% vs -1.2% in May

USD/CAD

• 1.2641 = fractionally fresh 14mth low for USD/CAD in Asia Monday
• 1.2672 = subsequent high (during the European am)
• 1.2681 (July 12 low after BoC’s hawkish hike) is now a resistance level
• IMM CAD shorts were slashed by 31k contracts to 8,604 in week to July 11
• Lowest net CAD short position for three months

AUD/USD

• Mooted offers near 0.7850 are helping to keep a lid on AUD/USD
• 0.7850 = 38.2% of 0.9505 (2014 high) to 0.6827 (2016 low)
• 0.7835/39 = Friday/Asia 2yr highs. 0.7802-0.7818 = European am range

NZD/USD

• NZD/USD traded a modest 18 pip range through the European am
• 0.7317-0.7335. Asia range was 0.7316-0.7361 (high before low)
• Asia drop to 0.7316 influenced by RBNZ Bascand speech
• NZ Q2 inflation data due 2245GMT, +1.9% y/y f/c vs +2.2% y/y in Q1

FX OPTIONS

• EUR/USD 1.15 barriers cap, Focus ECB, Thursday vol 87 pips break even
• EUR 4bln 1.1500 expiries next Mon/Tues, could be linked to barriers
• USD/JPY vols heavy, but risk reversals highlight downside risk to spot
• Cable vols heavy, market not convinced about further GBP gains
• AUD/USD vols ramped and look better value than NZD on a realised basis

COMMENT

ECB policy adjustment may spur euro gains

This week’s key European event risk is Thursday’s ECB monetary policy and there’s scope for euro zone bond yields and the euro to go higher on the back of it. QE taper is coming and the lead into a likely early 2018 reduction may include a gradual adjustment to the ECB’s communication. Preparation for the next taper announcement could see the removal of the bias towards increasing size and duration of asset purchases if the economic outlook deteriorates. The ECB has highlighted that as economic conditions and fundamentals in the euro area improve, some tightening in financial conditions is to be expected. However, given the fragility of the inflation trend and the recent taper tantrum, Draghi will want to avoid sounding too hawkish.

CHART

USD/JPY bears need close sub-112.32 Fibo

USD/JPY’s downward march paused on Monday following the spiral to 112.26 on Friday from the recent July 114.49 high. A “cloud twist” below the market on July 10 which managed to pull spot lower last week. While the effects of the “cloud twist” are waning, Friday’s long black candlestick line still weighs heavily. To force a deeper decline to the daily kijun line currently at 111.65, bears need sustained trading below the 112.32 Fibonacci level. It’s worth noting that USD/JPY bears finally managed to register a daily close below 113.15 after repeated failures, which is 23.6% retrace of the 108.81 to 114.49 (June to July) rise and also breached 112.32 – 38.2% of the same 108.81 to 114.49 gain. If the market manages to recover back above the daily tenkan line, now at 113.38, then the overall outlook will shift back to the upside

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