FX Market Update 3-8

Market Briefs

• EUR/USD -0.08%, USD/JPY -0.13%, GBP/USD +0.11%, EUR/GBP -0.18%
• DXY +0.09%, DAX -0.39%, FTSE +0.06%, Brent +0.42%, Gold -0.23%
• ECB says wages, consumer goods holding back inflation: bulletin
• EZ Jul Markit Comp final PMI, 55.7 vs f’cast 55.8, prev 55.8
• EZ Jun Retail sales y/y, 3.1% vs f’cast 2.6%, prev 2.6% rvsd 2.4%
• GB Jul Markit/CIPS serv PMI, 53.8 vs f’cast 53.6, prev 53.4
• DE Jul Markit Comp final PMI, 54.7 vs f’cast 55.1, prev 55.1
• China welcomes U.S. seeking dialogue with North Korea
• In rare bipartisan display, U.S. Democrats back Trump on China trade probe
• China eyes widening yuan band amid reform pressures – sources
• China to report strong July economic data; trade numbers could fuel friction with US
• Japan hopes to hold economic talks with US in October – finmin
• MoF flow data wk-ended July 29 – Japanese again good buyers of for-bonds
• Net Y1.067 trln bought, Y137.4 bln stocks bought too, Y30.7 bln bills sold
• Foreign investors mixed on Japanese assets
• Japan July PMI services 52.0, comp 51.8, June 53.3, 52.9, new orders eased
• Oil up on tighter U.S. market, but OPEC supplies weigh
• Gold prices fall as investors turn to risk assets

Looking Ahead – Economic Data (GMT)

• N/A US Chain Store Sales (Jul)
• 11:30 US Challenger Job Cuts (Jul) (prev 31,105)
• 12:30 US Initial Jobless Claims (w/e Jul 29) (mkt 240k, prev 244k)
• 12:30 US Continued Claims (w/e Jul 22) (mkt 1.955 mn, prev 1.964 mn)
• 13:45 US Markit Services PMI (final Jul) (flash 53.2)
• 14:00 US ISM Non-mfg Index (Jul) (mkt 57.0, prev 57.4)
• 14:00 US Factory Orders (Jun) (mkt +2.9% m/m, prev -0.8% m/m)
• 14:00 US Factory Orders ex-Trans (Jul) (prev +0.2% m/m)

Looking Ahead – Events, Other Releases (GMT)

• 11:00 BoE MPC meeting
• 11.30 BoE Gov Carney press conf
• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $475 mn)

Currency Summaries

EUR/USD

• EUR/USD setback from Wed’s 2.5yr high 1.1910 based 1.1830 early London
• Better than f/cast EZ retail sales for June underpins since, 1.1841-51 after
• US Jobless claims, Factory orders, ISM non manf PMI stand out data later
• Bids touted in to 1.1800. Support Wed/Tues lows 1.1794/86. Tenkan 1.1764
• Little resistance until huge 1.20 barriers, then 1.2167, 50% of 2014-2017 fall
• Option vols at cycle highs, O/n vol pricing 75 pips break even over NFP Fri

USD/JPY

• Range has been 110.56-82 so far. Bids said to be in size sub 110.50
• Trading circa the 110.66 pivot point this session
• More bids likely closer to 110, recall Tue’s 109.92 low on 110 barrier brk
• Larger NY Cut Expiries: 110.00-10 (1B) & 111.75-80 (936M)
• Upside risk grows due to “cloud twist” circa 111.37-39 Thu

EUR/CHF

• EUR/CHF elicited support pre-1.1455 after extending south from 1.1524
• 1.1455 was Monday’s high. 1.1524 = 31mth high Wednesday
• More short positions were squeezed en route to 1.1524
• 1.1524 = 4.68% above last week’s 1.1009 low (before Jordan’s 1.10 view)
• Recent cross surge influenced by German/euro zone economic data beats
• Euro zone June retail sales +0.5% vs +0.1% f/c

GBP/USD

• Cable ascended thru 1.3250 after modest UK service PMI beat
• 53.8 vs 53.6 f/c. 1.3267 = 11mth high after stops above 1.3250 tripped
• EUR/GBP dropped to threaten 0.8922 on modest UK service PMI beat
• 0.8922 = intra-week low. Key resistance 0.90 (option barrier level)
• BoE MPA, MPC minutes & QIR 1100GMT, Carney 1130GMT-1230GMT
• Relatively dovish BoE message could inflate EUR/GBP thru 0.90

USD/CAD

• More shorts squeezed during USD/CAD rise to 1.2618 European am high
• 1.2618 = 2wk peak (1.2452 = Tuesday’s low; 1.2414 = recent 25mth low)
• Canada July jobs data due Friday, alongside July’s US employment report

AUD/USD

• AUD/USD consolidated losses below 0.7941 through the European am
• 0.7941 was Wednesday’s low. 0.7914 = eight-day low in Asia
• US/China trade friction flagged as factor in AUD/USD losses
• Democrats back Trump on China trade probe (Wednesday)

NZD/USD

• NZD/USD revisited 0.7393 in early European trade. 0.7393 = 2wk low in Asia
• 0.7400 option expiry for NY cut, NZD 118mn strike (closest-to-market)
• Next week’s key NZ event risk is RBNZ meeting (Aug 10 local time)

FX OPTIONS

• GBP O/n vols well bid in to BoE MPC and inflation – Cable is 87 pips
• EUR/GBP o/n 55 pips but excludes NFP. EUR/USD o/n vol 15.0/75 pips
• Plenty of US data today, NFP Fri. EUR vols cycle highs, 1.20 barriers eyed
• USD/JPY vols rich vs realised as spot holds mid 110’s
• Commod related vols all higher, AUD, NZD and ACD vols cycle highs

COMMENT

EUR/USD 1.20 knockout could extend the rally

Plenty of talk about large 1.2000 barriers in EUR/USD of late, but a lot of these are RKO triggers attached to EUR call vanilla options in the 1.1600-1.1700 area. If market makers have exposure to these options, then a 1.20 break would leave them net short of gamma with the need to cover. This would trigger a renewed bout of EUR demand as well as another boost for shorter-dated implied vols. It could even be fears of a near-term 1.20 breach that are giving EUR/USD implied vols another lift to cycle highs in London this morning. While there has been talk of profit taking offers above 1.2000, it would seem prudent to gauge the demand for EUR if and when 1.20 breaks, to try and maximise profits on cash longs. If market makers are driven to cover, then there’s no reason why the key 1.2167 – 50% Fibo of 1.3995-1.0340 drop, could not be achieved soon after.

CHART

No respite for USD index, sub-90.00 beckons

The dollar index remains under pressure and looks set for an eventual drop below 90.00. Fourteen-week momentum remains negative as has been the case since March, reinforcing the underlying negative bias and the persistent headwinds facing the dollar. Dollar bears are bracing for a battle circa the 200-WMA at 92.313 and then 91.931, the 38.2% retrace of the 72.696 to 103.82 (2011 to 2017) rise. A close below these levels on a weekly basis would pave the way to 88.258, the 50% retrace of the same 72.696 to 103.82 rise. Widening 30-week lower and upper Bolli bands are indicative of the continued increase in statistical volatility, as the lower band is pointing south, reinforcing the underlying negative skew. Only a sustained recovery above last week’s 94.285 peak will reverse the trend.

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