FX Market Update 14-9

Market Briefs

• EUR/USD 0.13%, USD/JPY -0.05%, GBP/USD -0.08%, EUR/GBP 0.23%
• DXY -0.2%, DAX -0.24%, FTSE 0.07%, Brent 0.65%, Gold 0.2%
• N.Korea threatens to “sink” Japan, reduce U.S. to “ashes and darkness”
• Bank of England to balance Brexit and inflation as it seeks right note on rates
• Euro zone inflation seems to have bottomed out: ECB’s Smets
• ECB needs more evidence before deciding on cutting stimulus – Jazbec
• SNB lowered its 2017 growth forecast just under 1% from 1.5%
• OECD raises France’s economic growth outlook
• GB Aug RICS Housing Survey 6 vs 1
• GB Sep TR IPSOS PCSI 47.78 vs 49.53
• DE Sep TR IPSOS PCSI 57.13 vs 56.73
• China’s economy losing some steam as investment growth hits 18-year low
• Japanese buy net Y306.1 bln for-bonds, Y198.7 bln bonds, Y40.6 bln bills
• Foreign investors buy net Y555.8 bln JGBs, Y1.9092 trln bills latest week
• Foreign investors also sell net Y644.6 bln Japanese stocks Sept 9 week
• Oil holds gains, buoyed by stronger demand
• Gold slips to lowest in nearly 2 weeks, U.S. inflation data in focus

Looking Ahead – Economic Data (GMT)

• 12:30 CA Jul New Housing Price Index f’cast 0.3%, prev 0.2%
• 12:30 US Initial Jobless Claims (w/e Sep 9) (mkt 300k, prev 298k)
• 12:30 US Continued Claims (w/e Sep 2) (mkt 1.985 mn, prev 1.940 mn)
• 12:30 US CPI (Aug) (mkt +0.3% m/m, +1.8% y/y; prev +0.1% m/m, +1.7% y/y)
• 12:30 US CPI ex-Food and Energy (Aug) (mkt +0.2% m/m, +1.6% y/y; prev +0.1% m/m, +1.7% y/y)
• 12:30 US Real Average Weekly Earnings (mkt -0.2% m/m, prev +0.2% m/m)
• 15:00 US Cleveland Fed Median CPI (prev +0.2% m/m)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 30-year Ginnie Mae (max $1.15 bn)

Currency Summaries

EUR/USD

• EUR/USD trades a little higher in Europe from 1.1867 to 1.1910
• ECB’s Smets thinks inflation may have bottomed
• ECB’s Jazbec says the strong euro is reflection of robust growth
• Italy’s employers group raises 2017 GDP f/c to 1.5% from 1.3%
• Pushes over 1.1900 brief likely influenced by possibility US tax deal
• U.S. CPI today seen key. Core measure seen softer, headline stronger
• EUR 1.3bn vanilla expiries today 1.1900-25 may be anchoring spot

USD/JPY

• USD/JPY remains overall bullish but n-term longs shake out likely
• USD/JPY range has been 110.36-110.73
• While scope is for 111.00, expect dip sub 110 first
• North Korea missile threats have capped USD/JPY bids
• Japanese exporters heavy ahead of 111.00 psychological level
• There are 1.3bln 109.50-65 NY cut expiries which could well attract

EUR/CHF

• The Swiss franc fell vs the eur and the dollar following the SNB policy meeting
• The CB left policy unchanged as expected but altered its language re the franc
• Said franc remains ‘highly valued’. Previously said was ‘significantly overvalued’ See [nL4N1LV31F] [nL5N1LT3MY]
• EUR/CHF rallied close to Aug’s 1.1537 peak in the aftermath of the meeting
• 1.1537 = high since 0.85 low after SNB scrapped 1.20 floor in Jan 2015
• Cross played 1.1440-1.1530 then a little lower to 1.1497 ahead of NY
• USD/CHF up to 0.9689 from 0.9618 before easing slightly

GBP/USD

• BoE MPA & MPC minutes at 1100GMT will impact GBP
• Sterling could fall if there are only two votes for a hike as per Aug 3
• Pound should rise if Haldane joins Saunders/McCafferty in voting for hike
• 1.3191-1.3225 = European am range for cable (high before low)
• Mooted EUR/GBP stops below 0.8980 at risk if 6-3 MPC rate vote
• 0.8983/84 = six-week lows for cross on Wednesday/Thursday

USD/CAD

• USD/CAD traded narrow 17 pip range during European am, 1.2171-1.2188
• 1.2160 = Asia low, base since Wednesday’s high of 1.2220
• 1.2165 & 1.2175 option expiries for NY cut, USD 216 & 210mn strikes

AUD/USD

• Large 0.8010 option expiry is helping to anchor AUD/USD
• AUD 1.32bln strike. 0.7994-0.8014 = European am range
• 0.8017 was Asia high after strong Australian jobs data

NZD/USD

• Poll showing Labour 4% ahead of National is helping weigh on NZD
• 0.7231 & 1.1071 = low/high for NZD/USD & AUD/NZD during European am
• AUD/NZD offers expected near 1.1100. Large 1.1100 option expiry Friday
• 1.1105 was Tuesday high before poll showed National 9% ahead of Labour

FX OPTIONS

• Cable vols bid in to MPC – O/n break even 103 pips – near highest post Brexit
• O/n Vols in EUR/USD and USD/JPY bid in to US CPI – latter is 83 pips breakeven
• 1 week expiry vols now get FOMC and opened higher in USD pairings today
• 3 month expiry now gets Dec FED and 3mth EUR up 0.4 as also gets Dec ECB
• Ongoing short covering of NZD gamma post NZ election, 1mth high since Jan

COMMENT

Pound getting more bang from BoE MPC event risks

Sterling looks set for another wild ride from 1100GMT when the BoE releases its monetary policy statement and MPC minutes–with the interest rate vote of prime interest. This will continue the recent pattern from June 15 and Aug 3, when a 5-3 MPC vote surprise and Haldane’s failure to join the hawks materially impacted the pound. Greater volatility for sterling on BoE MPC event risk days is one by-product of the MPC having reduced the number of its meetings from 12 per year to eight (as of this year). The next BoE MPA is in seven weeks, on Nov 2. This seven-week gap provides plenty of opportunity for speculation about UK monetary policy to ramp up again. A four-five week gap between MPC meetings was the norm when the committee met a dozen times a year. Confirmation of MPC dates in 2018 and 2019 are expected within days. Sterling option traders will be among those taking note of those dates.

CHART FOCUS

EUR/USD bulls seem out of their depth

EUR/USD bulls may soon run out of steam with technicals warning of a reversal lower which could see a drop to the 1.1678 Fibonacci level–23.6% retrace of the 1.3040 to 1.2092 2017 rise. EUR/USD bulls are likely to baulk at the 1.2097 level–the 38.2% retrace of the 1.4940 to 1.3040 (2011 to 2017) fall–which has capped the market in August and throughout September. EUR/USD is currently trading above the upper 30-month Bollinger band, which is now at 1.1808, meaning bulls are trading above their usual tolerance threshold. Therefore the expectation is for EUR/USD to drop back below the 30-month Bolli as the market attempts to revert towards the mean at the 30-month moving average at 1.1095. Bulls seem out of their depth at these levels and we see EUR/USD as a sell unless there is a monthly close above the aforementioned 1.2097 Fibonacci level.

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