FX Market Update 26-7

Market Briefs

• EUR/USD -0.17%, USD/JPY -0.04%, GBP/USD -0.08%, EUR/GBP -0.06%
• DXY +0.14%, DAX +0.45%, FTSE +0.65%, Brent +0.54%, Gold -0.21%
• GB Q2 GDP Prelim y/y, 1.7% vs f’cast 1.7%, prev 2.0%
• GB Jun BBA Mortgage Approvals, 40.200k, prev 40.347k rvsd 40.287k
• Fed expected to leave rates unchanged; balance sheet in focus
• UK’s Hammond says cannot be complacent about growth
• Banks dealing EU sovereign debt may be dragged out of London
• Vital for Greece to keep up reforms to secure debt market access -IMF
• Brawl over Obamacare repeal returns to U.S. Senate floor
• BOJ’s Nakaso: Japanese firms avoiding price hikes now but sentiment is changing
• China to convert all giant state companies into joint-stock firms by end-2017
• Oil prices rise as falling U.S. inventories stoke rebalancing hopes
• Gold drifts lower as dollar firms ahead of Fed

Looking Ahead – Economic Data (GMT)

• 11:00 US MBA Weekly Mortgage Application Indices
• 14:00 US New Home Sales (Jun) (mkt 0.615 mln, prev 0.610 mln)
• 14:30 EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

• 13:00 FOMC resumes two-day meeting
• 18:00 FOMC Statement

Currency Summaries

EUR/USD

• EUR/USD 1.1653-33 range in Asia after setback from Tues 1.1712 peak
• Mild USD recovery weighs, breaks Fri 1.1619 low early London for 1.1613
• Wider 10yr US/DE spreads, DXY nears Fri’s 94.357 hi vs 93.638 Tue
• Some talk of stops 1.1590-80. 1.1572 support – 38.2% June low to Tues hi
• Recovery to 1.1640 helped by the rally in EUR/CHF
• Expiries today 1.1600 (619M). 1.1650 (519M), 1.1700 (523M)

USD/JPY

• USD/JPY range has been 111.78-112.08
• Technical outlook mixed, but resolute 112.10 supply
• Japanese exporters are said to have decent offers above 112.00
• Note that the 200-DMA, currently @112.09, is also capping USD/JPY
• Talk that there are decent bids circa 111.70/75, from recent short-covering
• Said to option-related bids too below the market around 111.50
• BoJ DepGov Nakaso – Will pursue current easy policy till CPI target met
• Prices recently weak but turnaround soon, weak JPY helps, mantra unchanged
• Japan June corp service prices +0.8% y/y, +0.8% y/y last four months

EUR/CHF

• EUR/CHF rose from 1.1080 to 1.1106 during the European am
• 1.1106 = new 13mth high. Cross rose to threaten 1.11 after Ifo beat Tuesday
• CHF attractive as funding currency for carry trades (VIX sub-10)

GBP/USD

• Cable fell to 1.3008 after UK Q2 GDP matched 0.3% f/c at 0830GMT
• 1.3042 was pre-data release high vs 1.3000 early Ldn intra-day low
• 1.3000 = low water-mark since Tuesday’s 1wk high of 1.3084
• 1.3000 option expiry for NY cut, GBP 300mn strike
• More 1.3000 optioin expiries Thursday & Friday, GBP 1.5bln strikes
• EUR/GBP fell to 0.8914 (six-day low) pre-UK Q2 GDP data

USD/CAD

• Meagre 15 pip range for USD/CAD during European am, 1.2504-1.2519
• Loss consolidation is big-picture story: 1.2481 = Tuesday’s 14mth low
• Recent CAD gains influenced by expectations of another BoC rate hike
• 37% probability of BoC 25bp hike to 1.0% Sept 6-BOCWATCH on Eikon

AUD/USD

• AUD/USD elicited support pre-0.7875 after extending south early Europe
• 0.7875 = July 21 low. Drop to threaten 0.7875 on sub-f/c Aussie CPI & Lowe
• 0.7906 is high since 0.7875 threatened. 0.7900/10 option expiries for NY cut
• AUD 647mn strikes. More 0.7900 expiries thru month-end, AUD 1.19bln strikes

NZD/USD

• NZD/USD elicited fresh support pre-0.7400 after easing from 0.7436
• 0.7410 = early Europe low. 0.7436 was Asia high. 0.7405 = late NY low
• 0.7402 = Tuesday low after NZ detected 1st cases of bacterial cattle disease
• 0.7400 option expiry Thursday, NZD 182mn strike

FX OPTIONS

• EUR/USD vols off Tues highs. 3mth rolls over Oct ECB to underpin
• O/n vol premiums on the low side in to tonights FOMC
• GBP focus on very large 1.3000 expiries. Implied vols look heavy
• USD/JPY vols heavy but supported pre FOMC. AUD vols sold today
• EUR/CHF vols/EUR calls firmer with spot en route to post floor hi 1.12

CHART

USD/JPY 112.10 level tough to crack

USD/JPY outlook is mixed, with the recovery stalling so far at 112.08, matching last Friday’s high. The daily tenkan line at 112.10 continues to weigh heavily on the market and this level will be tough to crack as it is also the 38.2% retrace of the 114.49 to 110.62 fall. In addition, the 200-DMA adds to supply as it is currently residing at 112.09. While USD/JPY bears should be mindful of Monday’s doji and the failure below the daily cloud which currently spans 110.64-111.26, the risk is still a negative skew. 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. A break and daily close above 112.10, and more importantly 112.56 which is the kijun line and 50% retrace of the same 114.49 to 110.62 fall, will delay the downtrend

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