FX Market Update 20-7

The ECB has delivered a dovish surprise by retaining the easing bias for QE. The words “in terms of size and/or duration” have been retained, which is something that we were expecting although the consensus was looking for a change. The unchanged wording makes sense, as it allows the ECB to package a further adjustment lower in monthly purchases without giving the impression that QE is on a set course. Removing the wording would have run the risk that QE was being put on a path toward an eventual end.

We think the ECB will borrow the script from when it reduced monthly purchases from €80bn to €60bn when it likely announces in September that QE will be reduced to €40bn per month starting from the beginning of 2018. We expect strong signals at the September meeting, although an actual announcement could be left until the October ECB meeting (ie pass it on to the committee stage in terms of nitty gritty details). The EUR/USD is only modestly lower and back through 1.15 while Sept Bunds are up around 35 ticks and through 162


Market Briefs

• EUR/USD -0.11%, USD/JPY +0.36%, GBP/USD -0.45%, EUR/GBP +0.43%
• DXY +0.27%, DAX +0.47%, FTSE +0.64%, Brent -0.02%, Gold -0.25%
• ECB to lay groundwork for autumn policy shift
• EZ May Current account SA (EUR), 30.1 bln, prev 22.0 bln rvsd 23.5 bln
• GB Jun Retail sales y/y, 2.9% vs f’cast 2.5%, prev 0.9%
• DE Producer prices y/y, 2.4% vs f’cast 2.3%, prev 2.8%
• BOJ pushes back inflation target for 6th time, keeps policy steady
• BoJ showed little appetite for reducing its monetary stimulus
• BoJ pushed out timetable for reaching 2% inflation target
• Kuroda: Real rates will fall as inflation picks up
• Kuroda: Will maintain 2% inflation target
• Kuroda: No need to ease policy further now
• U.S., China fail to agree on trade issues, casting doubt on other issues
• Fitch says China’s regulation pledge could signal shift away from high growth targets
• Oil steady after drop in fuel stocks stokes demand hopes
• Gold retreats as dollar ticks up ahead of ECB meeting

Looking Ahead – Economic Data (GMT)

• 12:30 US Initial Jobless Claims (w/e Jul 15) (mkt 245k, prev 247k)
• 12:30 US Continued Claims (w/e Jul 8) (mkt 1.950 mn, prev 1.945 mn)
• 12:30 Philly Fed business index (Jul) (mkt 24.0, prev 27.6)
• 14:00 US Leading Economic Indicators (Jun) (mkt +0.4% m/m, prev +0.3% m/m)

Looking Ahead – Events, Other Releases (GMT)

• 11:45 ECB’s rate decision, followed by Mario Draghi’s news conference at 12:30
• 13:45 FedTrade operation 30-year Ginnie Mae (max $1.1 bn)
• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $500 mn)

Currency Summaries


• EUR/USD slightly lower ahead today’s ECB meeting
• A little shuffling of a large long position: http://reut.rs/2twvWi5
• EUR/USD 1.1496-1.1525 in Europe and 1.1500-32 in Asia
• Stops touted 1.1490. Support @ 200-HMA 1.1461. 21-DMA key @ 1.1391
• Resistance @ 1.1600 options & May 2016 peak 1.1616. 1.1583 2017 high


• Mini recovery after Kuroda sees USD/JPY rise to 112.42
• USD/JPY had made a low of 111.77 in Asia
• BoJ earlier did little to change the trajectory of USD/JPY
• Intra-day bulls seek an hourly close above 112.30 pivot point
• There are said to be decent offers circa 112.50
• Bias on lower, but failure below 111.65 a minor blow to bears
• Talk of semi-official names in size below 112.00 dismissed in Asia
• EUR/JPY follows USD/JPY ahead of ECB event risk


• EUR/CHF sideways above Wed’s 1.0988 base ahead of ECB. Plays 1.0998-1.1010
• 38.2% Fibo of June-July 1.0833-1.1073 rise is key support at 1.0981
• USD/CHF better bid. Extends rise fm Tues 0.9524 base. 0.9550-74 in Europe
• Tuesday’s low was close to the 0.9522 Brexit-week low
• Swiss trade surplus narrows to CHF 2.813 bln in June


• GBP/USD lower 1.3027-1.2971 ahead UK retail sales data
• Data beats estimates 0.6% mm & 2.9% yy (2.5% yy/0.4%)
• GBP/USD boosted to 1.3019 but then heads south to 1.2956
• Sales might have been better give deflator lowest since Jan
• Jul 14 low @ 1.2938 is key, was low ahead 1.3113 spike that day
• Rise inspired by BOE hawks Drop led by soft CPI data


• USD/CAD slide stalled 1.2578 Wed’s, recovery peaks 1.2631 today
• Hourly cloud providing resistance – currently 1.2633-41. 100HMA 1.2648
• WTI recovery peaks 47.26 Wed, consolidates low 47’s today, helps cap CAD
• Focus on opec/non opec meeting Monday in St Petersburg
• Big gains in USD/CAD vols again this week, buyers 1yr vols/CAD calls noted


• AUD/USD extended 2yr high to 0.7992 in Asia after local jobs
• Thick offers pre 0.8000 barriers, profits booked, setback to 0.7909
• Support from daily cloud 0.7929-0.7867, dip buyers noted within
• Awaiting Dep RBA Gov Debelle Fri, he may counter hawkish RBA min view
• Worth owning O/n option vol – 45 pips break even for straddle
• Market short gamma above 0.8000 barriers, break would accelerate AUD
• 1mth risk reversals sold 0.2 AUD puts – lowest downside vol bias in 8 years


• NZD to 8mth high 0.7388 from 0.7341 early Wed, setback to 0.7350
• 0.7373 to 0.7334 today. Good support before Tues 0.7261 pre spike low
• 10/21dma’s 0.7308/0.7299. Tkn-sen and Kijun-sen lines 0.7295/87
• Retest of Wed’s high opens up 0.7400 barriers and 8 Nov 2016 huigh 0.7403
• 2016 highs 0.7482-85 (8-7 Sept 2016). 864mln 0.7400 option expiry Friday


• EUR/USD awaits ECB – o/n break even around 85 pips ahead
• Barriers 1.1600 vulnerable unless Draghi back peddles recent hawkish spiel
• 1wk vols underpinned since capturing July FOMC today
• AUD unable to break 0.80 barriers, awaits Dep RBA Gov Debelle Friday
• JPY vols wane as ranges hold, but JPY call bids highlighted side fears


GBP’s data reaction sends a very bearish message

The outlook for the pound looks more bearish in the wake of today’s UK retail sales data. Sales beat estimates but sterling only got a brief boost before heading to session lows. GBP was sold ahead of the event too and the lack of sustainable strength suggests that the move down was triggered by sell-stops. If the selling ahead of the data was short entry, the rally would likely have been stronger and gains maintained. The key for GBP traders is that shorts have been pared. This was influenced by GBP/USD’s rise over perceived upside limits around 1.30/1.31 but that was a weak dollar story. In isolation, GBP is soft. GBP’s TWI failed to retrace 50% of May-June losses when GBP/USD hit 1.3126. Consequently traders are less short but GBP is weaker. Most traders still concentrate on GBP/USD despite the TWI’s importance. If that pair breaks under the July 14 low at 1.2938, expect a rush to sell.


USD/JPY direction on a knife-edge

USD/JPY is struggling for direction after the bears suffered a bit of a setback as the cross failed to close Wednesday below 111.65, 50% retrace of the 108.81 to 114.49 (June to July) rise. Another worry for bears is the long tail left on Wednesday’scandlestick line, an early sign of a possible basing. All is not lost for bears, however, as they have managed to force two daily closes below 112.32, which is 38.2% of the same 108.81 to 114.49 rise. The “cloud twist” on Aug 3 below the market circa 111.37 will likely act as a magnet, meaning the overall expectation remains marginally on the downside. However, the bias will revert to the upside if bulls manage to sustain trading back above the 112.32 Fibonacci level.


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