FX Market Update 11-9

Market Briefs

• EUR/USD -0.12%, USD/JPY 0.6%, GBP/USD 0.07%, EUR/GBP -0.15%
• DXY 0.11%, DAX 1.11%, FTSE 0.64%, Brent -0.56%, Gold -0.58%
• U.N. Security Council to vote Monday on weakened N.Korea sanctions – diplomats
• Irma churns through central Florida, leaves trail of destruction
• Easy ECB policy to limit firming euro’s negative impact – Coeure
• ECB has seen very little price pressure in recovery – Mersch
• Blocking EU repeal bill is vote for chaotic Brexit, minister warns UK lawmakers
• China fiscal revenue and spending growth slow in August
• JP July core machinery orders +8.0% m/m, -7.5% y/y, +4.4%, -7.3% eyed
• JP M/m gain in core orders best since Jan ’16, first rise in hour months
• JP Aug money supply M2 +4.0% y/y, M3 +3.4%, broadest liquidity +3.7%
• Investment trust assets in Japan reach new Y102.6 trln high – Nikkei
• Oil weakens on fears Irma could dent U.S. demand
• Gold retreats from 1-year high as dollar gains ground

Looking Ahead – Economic Data (GMT)

• 12:15 CA House Starts, Anuualized (Aug) (mkts 216k, prev 222.3k)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $600 mn)

Currency Summaries

EUR/USD

• Early move in Europe sees EUR/USD reach 1.1994
• Low follows Coeure’s mentioning the disinflationary effects of a strong euro
• But the ECBer also points out factors that will lesson these effects
• EUR/USD bases and climbs as high as 1.2030 ahead NA session
• EUR/USD longs grow by EUR 1.4bn to EUR 14.2bn in latest week
• Bond markets key. Wider UST/Bund spreads led the EUR/USD retreat Friday
• 2017 low @ 170bp 10 yr US/bund spread, Fri rally 172-178bp, now 176bp

USD/JPY

• USD/JPY range has been 108.05-108.61 today
• USD/JPY gapped at the Asia open to 108.05 from Fri’s 107.85 close
• Recovery aside, tech outlook bearish. Expect gap filling
• Retail names said to have been buying USD/JPY in Asia
• Offers likely to be decent circa 109.00, weekly cloud base @108.83
• Spot rise partly due to relief of no NK missile tests over weekend

EUR/CHF
• EUR/CHF consolidates near the recovery high at 1.1417 in Europe
• Cross off 1.1417 to 1.1395 then up again tracking EUR/USD
• EUR/CHF susceptible to further weakness, could probe last wk’s 1.1362 low
• Thurs SNB main scheduled event risk. SNB seen on hold with ECB
• Swiss domestic sight deposits rise to 471.462bln w/e Sept 8 vs 468.516
• Data suggests may have been some SNB fx activity last wk [nEONH990S0]
• USD/CHF back up as risk appetite helps the dollar recover across the board
• 0/9513 peak early Europe vs Fri 0.9422 low. Eases to 0.9485 then back up

GBP/USD

• EUR/GBP elicited support pre-0.9091 after quarter-penny fall early Europe
• 0.9091 = 1.10 GBP/EUR & 38.2% of 0.8744 (July low) to 0.9307 (Aug high)
• Cable met headwind at 1.3200 after firming from 1.3169 (late Asia low)
• Large 1.3200 option expiry Friday, GBP 1.69bln strike
• UK Aug CPI data due Tuesday, 2.8% f/c vs 2.6%. UK wage data due Weds
• Wage growth f/c 2.3% vs 2.1%. BoE event risk Thursday, 7-2 rate vote f/c

USD/CAD

• USD/CAD has fallen from 1.2149 to 1.2112 since the European open
• 1.2112 approximates to 50% retracement of Friday’s rise from 1.2063-1.2165
• Offers are tipped ahead of 1.2170: 1.2161 = Asia high

AUD/USD

• AUD/USD gravitated towards 0.8060 from 0.8029 European am low
• Large 0.8060 option expiry for 10am ET NY cut, AUD 785mn strike
• 0.8057 was early Europe high (pre-0.8029). 0.8034-0.8080 = Asia range

NZD/USD

• NZD/USD rose to threaten 0.7300 during the European am
• Decent size 0.7300 option expiry Tuesday, NZD 341mn strike
• 0.7225-0.7263 = Asia range. Above-figure resistance 0.7338

FX OPTIONS

• USD off its lows, risk recovering, no NK missiles, implied vols ease
• USD/JPY curve has given back all of Fridays gains, risk revs off highs
• EUR/USD curve eases as spot consolidates, EUR calls remain bid
• Cable see huge 1.3200 expiry Friday, plenty of data and MPC ahead
• NZD vols underpinned in to election. AUD vols peak, CAD vols cycle highs

COMMENT

BoE-Brexit constraint to limit GBP support

GBP might be doing well against the USD but the MPC will be more focused on its performance on a trade weighted basis where the exchange rate has been heading back toward its Oct 2016 lows. If this weakness accelerates and is seen as a function of diverging policy differentials then this is a risk that could see the BoE make an adjustment to interest rates. However, for now the BoE will have to make do with yet more tough talking maintaining that monetary policy “could need to be tightened by a somewhat greater extent” than implied by the market. There will be an attempt to highlight the inflationary impact of the recent fall in GBP TWI but countered by continued concern over consumer spending and a need to watch investment and wages. The BoE has been attempting to sound hawkish but its message continues to be ignored by the market due to Brexit negotiations. Given the uncertainties of Brexit it is going to be difficult for the BoE to adjust its communication in a meaningful way. Over the last few weeks it has become clear that the risks of a breakdown of Brexit negotiations and a cliff edge scenario have increased, but the BoE will persist in assuming a smooth Brexit. We continue to expect the BoE to remain on hold over the next 2-years and at least until there is greater clarity over the Brexit process.

CHART FOCUS

USD/ZAR bears counting on fresh 200-WMA assault

USD/ZAR’s rebound last week from the 200-WMA, today at 12.7815, has potential to extend to 13.24 before faltering. The last couple of times USD/ZAR has bounced from the average the price has rallied back to the weekly cloud base. The weekly cloud base lies at 13.2406 and is a good place to offer. However, market action has been below the cloud since July 2016 and is expected to weigh on recovery attempts again which might embolden the bears. Equally important is the aforementioned 200-WMA which has not been closed below since May 2012. A sustained break and close below the average would be huge for USD/ZAR bears and see further falls. In March, USD/ZAR tested the 50% Fibo of the 2011 to 2016 6.5410 to 7.9950 rise at 12.2680. A break of the 200-WMA sees scope for a test of that Fibo

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