FX Market Update 11-8

Market Briefs

• EUR/USD -0.12%, USD/JPY -0.13%, GBP/USD -0.11%, EUR/GBP -0.02%
• DXY +0.08%, DAX -0.34%, FTSE -1.06%, Brent -0.58%, Gold +0.12%
• EUR 2.5 billion vanilla option expiries 1.1750-65 today
• DE Jul final CPI y/y, 1.7% vs f’cast 1.7%, prev 1.7%
• DE Jul HICP final y/y, 1.5% vs f’cast 1.5%, prev 1.5%
• China should be neutral if N.Korea fires first on U.S. – Global Times
• China’s July fiscal spending pace slows, but revenues rise
• China’s money rates slightly up on central bank-led cash drain
• Oil drops as IEA sees slow market rebalancing
• Gold buoyed by U.S.-N. Korea tensions

Looking Ahead – Economic Data (GMT)

• 12:30 US CPI (Jul) (mkt 1.8%, prev 1.6%)
• 12:30 US Core CPI (Juk) (mkt 1.7%, prev 1.7%)
• 17:00 Baker-Hughes Oil Rig Count (weekly) (prev 765; -1 w/w, +384 y/y)

Looking Ahead – Events, Other Releases (GMT)

• 13:40 Fed’s Kaplan speaks at certified public accountants event
• 15:30 Fed’s Kashkari speaks at moderated Q&A event
• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $475 mn)

Currency Summaries

EUR/USD

• EUR/USD trading a 1.1749-78 range so holding close to today’s expiries
• U.S. CPI data ahead follows softer than f/c PPI release yesterday
• EUR longs likely inclined to book profits after 1.1910-1.1889 reverse
• U.S. rates moving lower and providing support for the uptrend
• 2 year Fed fundd at 2017 low:

USD/JPY

• USD/JPY 108.91-109.26 range in Asia and Europe. June low 108.81
• Early bias higher but pair then gravitates back towards 109.00
• USD 1.6 billion vanilla options expiries @ 109.00 today
• Softer US rates evident ahead CPI data today:
• Soft PPI data yesterday likely influencing the dovish view
• Early Aug lows @ 109.85 now resistance. 2017 low @ 108.13 key below

EUR/CHF

• CHF continues to benefit from risk aversion on the back of N.Korea concerns
• VIX at highest level since Nov, world stocks set for worst week since Nov
• EUR/CHF dropped to threaten 1.1261 (Wednesday low) during European am
• 1.1261 = 50% retracement of 1.0984 (July 13 low) to 1.1537 (Aug 4 high)
• Asia low was 1.1300 (1.1301 was Thursday’s low).
• 1.1300 option expiry for 10am ET NY cut, EUR 200mn strike

GBP/USD

• Cable eased towards 1.2950 during Ldn am after holding sub-1.30 in Asia
• Bids near 1.2950 based cable losses on Tuesday & Thursday
• Offers above 1.30 kept lid on cable Thursday (after 1.2950 threatened)
• Morgan Stanley sees EUR/GBP at 1.00 at start of 2018
• 0.9805 marks all-time high for EUR/GBP (Dec 2008)
• Bids ahead of 0.9000 propped cross on Wednesday & Thursday

USD/CAD

• 1.2724 = European am low for USD/CAD after 4wk high of 1.2753 in Asia
• Ascent to 1.2753 courtesy of risk aversion on N.Korea concerns
• 1.2725, 1.2735, 1.2740 & 1.2745 expiries for NY cut (closest-to-market)
• USD 1.35bln = cumulative size of the 1.2725-45 option expiries
• WTI fell to 16-day low just shy of 48.00/barrel during European am

AUD/USD

• 0.7850 expiry for NY cut is helping to anchor AUD/USD after losses in Asia
• AUD 347mn strike. 0.7839 = 23-day low in Asia on risk aversion/proxy flow
• AUD is lead EM Asia currency proxy. VIX at highest level since Nov
• World stocks set for worst week since Nov on N.Korea concerns

NZD/USD

• 0.7291 = European am high for NZD/USD after 0.7253 revisited in Asia
• 0.7253 was Thursday’s 4wk low after RBNZ jawboning on NZD
• AUD/NZD extended south from 1.0862 to 1.0775 during the European am
• 1.0862 = 3mth high Thursday. AUD hurt by EM Asia currency proxy flow

FX OPTIONS

• USD/JPY 109.00 (1.64BLN), 109.75 (660M)
• EUR/USD 1.1700 (1.17BLN), 1.1750/55 (1.33BLN), 1.1760/65 (1.15BLN)
• EUR/JPY 127.25 (320M), 128.25 (400M), 131.00 (264M)
• EUR/GBP 0.9000 (875M), 0.9300 (623M) EUR/CHF 1.1300 (200M)
• AUD/USD 0.7850 (347M), 0.7900 (643M), 0.7930 (365M)
• USD/CAD 1.2650 (535M), 1.2725 (445M), 1.2735 40 (655M)

COMMENT

USD/JPY has more room to move down

USD/JPY has room to move lower. The absence of Tokyo traders contributed to the break below 109.00. Japanese names have been the main buyers all week and though some doubtless left bids over the holiday, buying was likely reduced as was liquidity. The number of speculative longs, which have certainly been pared this week, are likely to be very large. Risk aversion has been blamed for a lot of the slide this week and overshadowing a key driver, U.S interest rates. Despite strong NFP and JOLTS data, the expected path of U.S. rates has dropped. Fed funds price just 40bp of tightening in the next two years, matching earlier August and June lows. U.S. PPI missed the Rtrs poll forecast suggesting risk to rates from today’s CPI is also to the downside. Reduced Japanese demand may allow for a test towards the 2017 low at 108.13. Should 108.00 break there is little to support USD/JPY ahead of major Nov 2016 high/lows 106.95-106.50.

CHART

USD/JPY pushing an accommodating envelope

Pressure on the 30-day lower Bollinger and the widening of the envelope has freed up room for USD/JPY to go lower this week. Thursday’s sharp fall from 110.18 to 109.15 was contained by the lower Bollinger at 109.13 and a further test of 108.85 earlier Friday saw another rebound, albeit modest. USD/JPY is currently tracking lower within a lower Bollinger and 10-DMA channel with the short-term average on top at 110.14. We would look to fade the 10-DMA on any adjustment but the technical picture is beginning to favour a short play on a break below the 108.81 low from the June 14 hammer candle. Weekly charts also show the market being held up by a Bollinger line and a cloud base at 108.61 and 108.83 respectively. If the market can close below the weekly cloud, the 108.13 low from April becomes vulnerable.

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