FX Market Update 19-7

Market Briefs

• EUR/USD -0.17%, USD/JPY -0.1%, GBP/USD -0.13%, EUR/GBP -0.03%
• DXY +0.17%, DAX +0.06%, FTSE +0.18%, Brent +0.61%, Gold -0.16%
• Villeroy: ECB has made progress steering inflation but loose monetary policy still needed
• Britain will probably need to set up fewer than 10 new regulators after Brexit – government source
• Japan retains modestly optimist view on economy, overall view unchanged
• Over halfway into the year, steel outshines oil markets
• Strong gasoline boosts oil price, but high OPEC supplies weigh
• Gold retreats below $1,240/oz as dollar edges off 10-month low

Looking Ahead – Economic Data (GMT)

• 11:00 US MBA Weekly Mortgage Application Indices
• 12:30 US Housing Starts (Jun) (mkt 1.155 mn SAAR, prev 1.092 mn SAAR)
• 12:30 US Building Permits (Jun) (mkt 1.200 mn SAAR, prev 1.168 mn SAAR)
• 12:30 CA Manufacturing sales m/m (May) (mkt 0.8%, prev 1.1%)
• 14:30 US EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

• 13:00 US Treasury Secretary Mnuchin and Commerce Secretary Ross chair U.S.-China
Comprehensive Economic Dialog; Washington, DC
• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.575 bn)

Currency Summaries

EUR/USD

• Slow day with EUR/USD drifting down slightly. Asia 1.1536-57, Europe 1.1515-47
• Lull ahead tomorrow’s ECB encourages a little profit-taking
• Uptrend solid and dips remain shallow, indicative of further gains
• Slightly softer yields lead small widening UST/bund spreads
• While rates moves weigh EUR/USD, likely just bonds shuffling ahead ECB
• Lots of EUR bids touted 1.1480-1.1510. Real money offers 1.1585-1.1600

USD/JPY

• USD/JPY bears run into decent bids, range has been 111.88-112.23
• Support ahead of 111.65 – 50% Fibo but outlook negative
• Rumours semi-official bids keeping spot away from Tue’s 111.69 low
• More informed players say bids ahead of 111.69 merely from near-term shorts
• Offers said to be in size around 112.50 level
• Down but not out in Tokyo; US yields key
• BoJ to keep policy unchanged, may tweak forecasts

EUR/CHF

• EUR/CHF continues to consolidate below Friday’s 1.1073 peak
• Tracks EUR/USD in Europe and cross probed back under 1.10;
• 1.1031-1.0994 early doors then better bid to retest the figure
• USD/CHF off Tues 0.9524 base but remains offered, plays 0.9560-0.9530
• Risk tilted lower in line with broad dollar weakness. DXY near 10-mth low
• Next major event risk: ECB & BOJ meetings on Thurs

GBP/USD

• GBP in quiet trade near the lows that followed CPI data
• 1.3011-49 range today after 1.3126-1.3005 dump on the data
• Quiet may well hold until release of UK retail sales tomorrow
• Sales eyed 2.5% yy in June compared 0.9% in May
• Small bounce from 1.3005 suggests greater risks on the downside

USD/CAD

• USD/CAD losses based down at 1.2581 Tues but mild recovery since
• 1.2623-53 todays range. Limited support until 1.2523 – lower 30-day Bollinger
• USD/CAD has been tracking the bolli lower since the beginning of June
• May 2016 low at 1.2461 remains the downside objective
• Vol market holds firm – decent gains for back end vol since BoC
• 1mth 7.5 from 6.8 Mon (7.25 pre BoC). 1yr up from 7.4 to 8.0 since BoC

AUD/USD

• AUD rally to new 2yr highs leaves 0.7950 and larger 0.8000 barriers intact
• 0.7948 todays high, setbacks limited to 0.7913 since. Thurs Job data eyed
• RBA speakers due Fri – Debelle and Bullock- aid short dated vol support
• Speakers may yet try to temper hawkish expectations from RBA minutes
• O/n vol 17.0 or 57 pips. 1wk 10.0/87 pips. 1mth 7.0 to 8.7 since last week
• Market short gamma/options above 0.8000 barriers – risk lies here

NZD/USD

• 0.7341-0.7388 todays range after 0.7261-0.7373 Tues
• Techs stay bullish with s/t-DMA’s aligned higher, 2017 peak sits 0.7375
• Big 0.7400 option expiry Friday near term focus – 864mln
• NZD vols have closed their premium to AUD as latter outperfoms
• AUD/NZD remains elevated – matches Tues 1.800 high
• NZ migration for Jun Thurs, Australia jobs more likely to impact cross

FX OPTIONS

• O/n EUR/USD vol high around 80 pips in to ECB Thurs
• EUR call demand dampened by EUR put/cash hedges pre ECB
• AUD/USD vols firm, 0.8000 barriers vulnerable. AUD puts 8yr lows
• GBP gamma performing of late. Back end vol demand notable
• JPY calls stay bid but USD/JPY vols capped. BoJ risk premium tame

COMMENT

FX market braces for potential ECB volatility

Overnight EUR/USD vol priced around 17.0 at the London open Wednesday, which has a breakeven of 87 pips for the straddle over Thursday’s ECB meeting. This is at the high end of recent ECB pricing and highlights the increased risk premium attached. Investors will be watching to see if Draghi tries to back-peddle his late June hawkish rhetoric, which lifted EUR/USD through 1.1300 and into the upper 1.15s since. Vols rallied again this week as 1.1500 barriers were breached, but have peaked for now as spot consolidates. The market needs a convincing break of those barriers at 1.1600 to reignite any meaningful vol demand, while a spot setback would take vols back toward recent and long-term lows. Front-end risk reversals are bid for EUR calls, but are well off the late June highs (1mth 0.35 from 0.7). Demand for EUR puts as long cash hedges helps to limit that EUR call demand, despite recent spot gains.

CHART

EUR/USD adjustment offers buying opportunities

There’s growing risk of a EUR/USD adjustment towards the 30-DMA at 1.1318 after Tuesday’s close below the upper 30-day Bollinger, and this could provide fresh buying opportunities. The rise to the 2017 1.1583 high yesterday broke above but closed below the band, signaling that the market is overbought and corrective action is due. Such a view is reinforced by the slow stochastic, which is on the verge of a negative cross as it begins to turn over from overbought territory. However, the 10- and 21-DMAs remain bullishly aligned and provide good support at 1.1453 and 1.1375 respectively. Buying a bounce from either of those could prove a good strategy for another assault towards 2016’s 1.1616 peak. The 38.2% and 50% Fibos of the 1.1119 to 1.1583 June to July rise provide further support at 1.1406 and 1.1351

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