FX market update 8-9

Market Briefs

• EUR/USD 0.39%, USD/JPY -0.88%, GBP/USD 0.51%, EUR/GBP -0.13%
• DXY -0.62%, DAX -0.09, FTSE -0.32%, Brent 0.57%, Gold 0.39%
• ECB policymakers agreed on stimulus cut at meeting-sources
• Irma powers toward Florida, leaving behind path of death, destruction
• Stop fighting over Brexit and get real, Jim O’Neill tells UK
• S. Korea detects Xenon possibly from N. Korea Nucleur Test
• DE Jul Exports mm SA 0.20% vs -2.80%, rvsd -2.70%, f’cast 1.25%
• DE Jul Trade balance 19.5bln vs 21.2bln, f’cast 20.3bln
• GB Jul Industrial output mm 0.2% vs 0.5%, f’cast 0.2%
• GB Jul Manufact output 0.5% vs 0%, f’cast 0.3%
• GB Jul Goods trade balance -11.58bln vs -12.72bln, f’cast -11.95bln
• JP Q2 GDP rev +0.6% q/q, +2.5% AR, +0.7%/+2.9% eyed, prelim +1.0%/+4.0%
• JP CAPEX revised down large to +0.5% from prelim +2.4%, +0.5% eyed
• Despite GDP revision, Q3 exports-output healthy, GDP growth to continue
• JP Jul c/a surplus Y2.32 trln, Y2.06 trln eyed, Jun surplus Y934.6 bln
• JP Aug flow data – Japanese buy net Y745.3 bln for-bonds, Y1.058 trln stocks
• JP Foreigners sell Y1.08trln Japan stocks, buy Y2.33trln JGBs, Y2.5trln bills
• Oil steady as Irma heads for Florida, Saudi Arabia cuts supply
• Gold hits 1-yr peak as dollar sags, N.Korea concerns support

Looking Ahead – Economic Data (GMT)

• 14:00 Wholesale Inventories (Jul) (advance +0.4% m/m, prev +0.7% m/m)
• 14:00 Wholesale Sales (Jul) (mkt +0.4% m/m, prev +0.7% m/m)
• 17:00 Baker-Hughes Weekly Oil Rig Count (prev 759, unch w/w, +352 y/y)
• 19:00 Consumer Credit (Jul) (mkt +$15.10 bn, prev +$12.40 bn)
• 12:30 CA Aug jobs data, employment f/c +19k, jobless rate f/c 6.3%

Looking Ahead – Events, Other Releases (GMT)

• 12:45 FRB Philadelphia’s Harker speaks on “Consumer Finance Issues”; Philadelphia, PA
• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $2.05 bn)

Currency Summaries

EUR/USD

• EUR/USD consolidates Asia’s strong rally in the European session
• Pair backs off to 1.2037 from 1.2092 high (Asia 1.2018-1.2092)
• Tighter UST/Bund spreads are underpinning EUR/USD, 10 yr narrows 4bp today
• ECB policymakers are agreed on the need to cut stimulus
• EUR 1.7bln vanilla exp @ 1.2000, EUR 600mln 1.2050 & EUR 400mln 1.2100
• Large number of expiries will help anchor ahead 14GMT cut
• China unease with CNY strength prompts intervention
• Other EM CBs also intervening, rebalancing set to weigh USD/majors
• Resistance @ 1.2100 options, 1.2109 Jan 2015 high & 1.2167 50% 1.3995-1.0340
• Scarcity exp over 1.2200 suggests limited resistance: http://reut.rs/2eRfHv1

USD/JPY

• Risk aversion in terms of North Korea and US politics weighs
• UST-JGB spreads are narrowing, decent correlation with USD/JPY
• USD/JPY bears seeking a weekly close below 108.83
• 108.83 is weekly cloud base & 50% retrace of 99.00-118.66 rise
• Dived through 108.00 in Asia, taking out much touted option barriers
• Friday sees drop from 108.48 to a new 2017 low @107.57

USD/CHF

• Risk aversion helped CHF to its highest level since Aug 2015 vs USD
• USD weakness, N Korea anniversary threat & Hurricane Irma weigh
• USD/CHF dropped through last week’s 0.9428 base to 0.9422 early Europe
• Recovery since to 0.9483 but broader trend stays bearish
• The low in Aug 2015 was 0.9260 and support is thin ahead of there
• EUR/CHF 1.1390-1.1434 range. Unlikely to see Thurs 1.1483 high just now

GBP/USD

• Cable extended north to a 5wk high of 1.3160 during the European am
• Trump/Cohn tension & less hawkish Dudley helping weigh on USD
• Offers expected near 1.32: big 1.3200 expiry Sept 15, GBP 1.57bln strike
• EUR/GBP fell from 0.9200 to threaten 0.9155 during the European am
• 0.9155 was pullback low from Thursday’s ECB day high of 0.9202

USD/CAD

• Profit-taking on shorts helped inflate USD/CAD from 1.2063 to 1.2122
• 1.2063 = early Europe 28mth low. 1.2065 was Asia low
• 1.2140 (Wednesday’s low after BoC hike) is now a resistance level
• Canada Aug jobs data due 1230GMT, employment f/c +19k

AUD/USD

• 0.8082 = low water-mark for AUD/USD since 0.8125 early Europe high
• Ascent to 0.8125 influenced by Trump/Cohn friction & less hawkish Dudley
• 0.8125 = 28mth high. AUD has shrugged off lower iron ore & copper prices

NZD/USD

• Profit-taking on longs helped deflate NZD/USD by half-a-cent from 0.7338
• 0.7338 = late Asia/early Europe high (0.7335 = Aug 18/19 & 21/22 highs)
• Big AUD/NZD 1.1100 option expiry next week (Sept 15), AUD 865mn strike

FX OPTIONS

• USD weakness and risk aversion pre NK anniversary fuel vol demand
• EUR/USD vols recover with spot, 1.21 barrier eyed, EUR calls high
• USD/JPY breaks 108 barriers, fears of deeper declines – 1mth up 1.0
• AUD 1mth gains 0.5, NZD/USD 1mth 1.6 premium to AUD over election
• CAD tests initial 1.2050 target, vols regain pre BoC/cycle highs

COMMENT

USD/JPY could well be in free-fall mode

Technicals suggest USD/JPY may be set for a free-fall as bears seek a weekly close below the 108.83 Fibonacci level, which doubles up as the 50% retrace of the 99.00 to 118.66 (June to December 2016) rise and the weekly cloud base. If bears manage to force a close below 108.83 at the end of trading Friday, which seems likely, then a collapse to test 106.51 could follow quickly. Note 106.51 is 61.8% retrace of the same 99.00 to 118.66 gain. The last time USD/JPY registered a close below the weekly cloud base, back in February 2016, saw a drop of over 10 big figures in the subsequent months to 99.00. Weekly tenkan and kijun lines are negatively aligned, reinforcing the overall bearish market structure. The market will need to trade back above the weekly cloud base, on a sustained basis, in order to lessen the downside risk.

CHART FOCUS

EUR/GBP bulls primed to charge higher, eye Aug high

EUR/GBP bulls are seeking a sustained break and close above the 10-DMA, at 0.9192 today, to spur a potential return to last month’s highs. The correction from August’s 0.9307 peak looks like it has run its course and Wednesday’s Doji reversal, confirmed by Thursday’s higher high and close, signaled a base. The price spiked above the 10-DMA to 0.9202 earlier this session but quickly returned below. Those playing the long side are looking for a more successful move above 0.92 and onto last month’s 0.9307 peak. Resistance above the Aug 29 0.9307 top is then likely at 50 intervals until the 0.9403 Oct 7 ‘flash crash’ high. Furthermore, last week’s bearish action formed a shooting star reversal on the candlestick charts, but in spite of a lower low this week it does not look like the cross will get the lower close required to confirm the signal, and thus risks a return to higher levels

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