FX Market Update 18-7

Market Briefs

• EUR/USD +0.68%, USD/JPY -0.41%, GBP/USD -0.11%, EUR/GBP +0.82%
• DXY -0. 5%, DAX -0.56%, FTSE +0.06%, Brent +0.37%, Gold +0.22%
• DE Jul ZEW Economic sentiment, 17.5 vs f’cast 18.0, prev 18.6
• DE Jul ZEW Current conditions, 86.4 vs f’cast 88.0, prev 88.0
• GB Jun Core CPI y/y, 2.4% vs f’cast 2.6%, prev 2.6%
• GB Jun CPI y/y, 2.6% vs f’cast 2.9%, prev 2.9%
• GB Jun RPI y/y, 3.5% vs f’cast 3.6%, prev 3.7%
• GB Jun RPIX y/y, 3.8%, prev 3.9%
• GB Jun PPI Input prices y/y NSA, 9.9% vs f’cast 8.8%, prev 11.6% rvsd 12.1%
• GB Jun PPI Output prices y/y NSA, 3.3% vs f’cast 3.3%, prev 3.6%
• Britain’s aim is to agree divorce deal so free trade talks can begin
• China’s property market slows, Beijing prices down for first time since 2015
• Japan gov’t says to miss primary surplus goal, debt/GDP ratio to fall
• Oil “stuck in range” as ample supply meets firm demand
• Gold scales two-week high as dollar slides

Looking Ahead – Economic Data (GMT)

• 12:30 US Import Prices (Jun) (mkt -0.2% m/m, prev -0.3% m/m)
• 12:30 US Export Prices (Jun) (mkt 0.0% m/m, prev -0.7% m/m)
• 12:55 US Redbook Same-Store Sales Index (weekly) (prev +2.4% y/y)
• 14:00 US NAHB Housing Market Index (Jul) (mkt 67, prev 67)
• 20:00 US TIC Data (Jun) (prev L-T flows ex-swaps +$1.8 bn)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $500 mn)

Currency Summaries

EUR/USD

• EUR/USD trading firmly over 1.15 after collapse of US healthcare bill
• US rates a tad lower:
• Asia 1.1472-1.1537. Europe 1.1511-1.1560
• New highs in Europe led buy EUR/GBP surge on news softer UK CPI
• May 2016 peak @ 1.1616 is widely held target of the 1.15 break
• Few options higher to put brakes on EUR/USD rise:
• Softer ZEW data 17.5 in Jul vs 18.6 in June (f/c 18) ignored

USD/JPY

• USD/JPY makes London recovery from the 111.99 Asia low
• Two factors saw USD/JPY get pushed lower in Asia from the 112.68 high
• Talk surrounding Bbg piece on BoJ E0TF buys saw non Japan players sell spot
• USD generally been in the doldrums since US Healthcare bill ran into trouble
• Many Tokyo players, back from Mon holidau, surprised by surge in IMM CTA JPY shorts
• 30/60-day log correlation between USD/JPY & UST-JGB 5, 10yr spreads significant
• Watch 5’s & 10′ closely for clues on USD/JPY direction
• BoJ board reshuffle may complicate BoJ’s retreat from radicalism – Rtrs
• Poll: Majority see BoJ pulling back from ultra-easy policy – Rtrs

EUR/CHF
• EUR/CHF plays out choppy ranges at the top end of its bull trend
• Early Tues action sees 1.1018 to 1.1069
• Capped by 1.1069 30DMA upper Bolli and supported by 1.1014 10DMA
• USD/CHF slumps after latest healthcare bill new out of the US
• EUR/USD rally through 1.1500 also a major driver for the cross
• Spot trades from 0.9633 to 0.9541 and remains offered into NY
• Next major event risk: ECB & BOJ meetings on Thur for policy clues

GBP/USD

• Cable extended south from 1.3126 to 1.3015 after sub-f/c UK June CPI data
• 2.6% vs 2.9% f/c. 1.3126 = 10mth cable peak shortly before 0800GMT
• 1.3075 = low just before UK data at 0830GMT. Stops tipped below 1.3000
• EUR/GBP extended north to 0.8855 after the UK inflation data
• 0.8814 was pre-data release high vs 0.8783 low just before 0800GMT
• Carney to speak at unveiling of new GBP 10 note at 1330GMT in Winchester

USD/CAD

• USD/CAD slid to a fresh 14mth low of 1.2605 during the European am
• Greenback hurt by collapse of second US healthcare bill
• 1.2702 was Asia high, before US politics negatively impacted USD
• Expectations of another BoC rate hike in autumn = CAD-positive
• 1.25 among USD/CAD bear targets (0.80 = CAD/USD)

AUD/USD

• AUD/USD extended north to 0.7924 (new 26mth top) in early European trade
• “Positive” RBA minutes & 5.3% China iron ore rise influenced AUD gains
• Greenback hurt by collapse of second US healthcare bill
• Offers touted at 0.7930, 0.7950 & pre-0.80 (option barrier level)

NZD/USD

• NZD extended north from 0.7261 to a high of 0.7361 in early European trade
• Ascent fuelled by USD weakness after collapse of 2nd US healthcare bill
• AUD/NZD extended north to 2mth high just shy of 1.08 during European am
• Cross rise fuelled by “positive” RBA minutes, iron ore gains & sub-f/c NZ CPI
• GDT auction result expected near 1500GMT, may impact NZD

FX OPTIONS

• EUR/USD vols firm with spot, but gains limited by barriers, Thurs ECB
• EUR/USD topside appears thinly covered by vanilla options on DTCC
• USD/JPY vols kept in check as broader spot ranges hold, but JPY calls bid
• Cable gamma performs, keeps short date vols bid. Back end vol demand
• AUD vols ramped with spot. 1mth AUD vol discount to NZD halved
• USD/CAD post BoC vol setbacks stall

COMMENT

Squeeze on EUR/SEK shorts after Riksbank minutes

The minutes from the Riksbank’s July policy meeting have taken the wind out of the SEK’s sails. This is just what the Swedish c.bank may have hoped for as it directs policy focus to the SEK and ECB. The minutes suggest further ECB asset purchases next year will make it difficult for the Riksbank to cease bond purchases. SEK has been riding high since the Riksbank removed its easing bias from the shorter-end of its rate path at the July meet. Inflation is close to the official 2% target and growth indicators have supported investor confidence. It remains to be seen how much of EUR/SEK’s 3% drop from June 28 9.8050 high is retraced and if the Riksbank has caused enough of a market re-think to trigger a full-blown reversal. Link to the Riksbank minutes:

CHART

Sterling trap-door opens on soft UK inflation data

Sterling’s downside is wide open in wake of June’s softer than expected UK inflation data, which has reduced the risk of a BoE rate hike before year-end. There has been a big reduction in GBP shorts recently that has been largely influenced by a one-sided focus on GBP/USD. While GBP/USD has topped the upside limits for most of those trading FX, GBP on a TWI basis has painted a very different picture. GBP TWI has remained weak, failing to reach a 50% retracement of the May-June drop. GBP shorts are USD 1bln smaller than those held before the Brexit referendum and at the lowest level since the Fed first hiked back in December 2015. UK inflation is still running above earnings while ONS data reveals a cooling in house price growth

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