FX Market Update 18-9

Market Briefs

• EUR/USD 0.03%, USD/JPY 0.34%, GBP/USD -0.43%, EUR/GBP 0.47%
• DXY 0.03%, DAX 0.31%, FTSE 0.34%, Brent -0.22%, Gold -0.34%
• Korean peninsula draws range of military drills in show of force against N.Korea
• ECB’s Hansson calls for broad discussion beyond “inordinate focus” on asset buys
• German inflation likely to slow in autumn: Bundesbank
• Britain proposes new security treaty with EU after Brexit
• EZ Aug Inflation Final YY 1.5% vs 1.5%, f’cast 1.5%
• EZ Aug Inflation Ex Food & Energy YY 1.3% vs 1.3%, f’cast 1.2%
• EZ Aug Inflation, Ex-Tobacco YY 1.50% vs 1.30%
• EZ Aug Inflation Exenerfoodalctob YY 1.2% vs 1.2%
• U.S. oil prices hit $50 on rising refinery demand, falling rig count
• Gold slips as equities, dollar surge ahead of Fed meet

Looking Ahead – Economic Data (GMT)

• 14:00 NAHB Housing Market Index (Sep) (mkt 67, prev 68)
• 15:00 BOE’s Carney speaks in Washington
• 20:00 Treasury International Capital Statistics (Jul)

Looking Ahead – Events, Other Releases (GMT)

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

Currency Summaries

EUR/USD

• EUR/USD 1.1915-55 softer in early trade then boosted by ECB view
• ECB’s Hansson-Next move should be recalibration of stimulus
• Normalisation should be gradual but CB should not err on side of caution
• EUR/USD today 1.1915-55 after 1.1837 on US CPI & 1.1988 on US retail sales
• Activity suppressed by event risk with FOMC Wednesday
• Breaks 100/200-DMAs 1.1925-1.1959 are needed to excite day traders
• No large option expiries today to influence EUR/USD

USD/JPY

• Yen weak due to investor risk appetite and focus on FOMC
• Yen initially sold due to quiet news weekend regarding NK
• There have also been reports PM Abe may call a snap election
• Bulls focus is on 112.00 and beyond this week
• USD/JPY up from 110.90 to 111.43, talk model funds have bought in Asia
• Market is currently stuck below 111.59 pivot point
• Large concentration of 110 expiries this week are a risk to USD/JPY bulls

EUR/CHF

• Softer EUR/CHF threatened Tenkan support @ 1.1446. Line sppted last wk
• Today’s 1.1451 low is the lowest for the cross since Thurs 1.1530 peak
• Price failed just shy of the 1.1537 Aug high last wk. Almost double top
• 1.1537 the high since 0.85 low after SNB scrapped 1.20 floor in Jan 2015
• Swiss domestic sight depos rose to 472.55bln vs 471.462bln w/e Sept 15
• Data suggests may have been some SNB fx activity last wk
• USD/CHF also a little softer. 0.9620-0.9588 in Europe. Back below cloud
• Closed under the cloud Friday was bearish. Retest of Fri’s 0.9565 low eyed
• Unlikely to see a major breakout ahead of FOMC on Wednesday

GBP/USD

• Offers ahead of 1.3620 capped early Ldn cable gains
• 1.3532 = subsequent pullback low. 1.3560-1.3604 was Asia range
• Cable also met headwind pre-1.3620 after Friday surge on Vlieghe
• EUR/GBP elicited fresh support pre-0.8772 in early European trade
• 0.8772 = 1.14 GBP/EUR. 0.8830 = subsequent rally high
• Cross rallied to 0.8828 after basing three pips shy of 0.8772 Friday

USD/CAD

• USD/CAD traded a 30 pip range during the European am, 1.2173-1.2203
• 1.2173 approximates to pre-weekend low after 1.2219 (Friday’s high)
• WTI back below USD 50/barrel at 1020GMT vs 50.33 European am high
• BoC’s Lane due to speak in Saskatoon at 1800GMT
• CAD soared after BoC surprised many in the market by hiking Sept 6

AUD/USD

• AUD/USD elicited support pre-0.8000 after retreating from 0.8035 (Asia high)
• 0.8002 = European am low. Large 0.8000 expiry Wednesday, AUD 653mn
• Asia high = pip shy of Friday’s peak. 0.8050/60 = additional resistance

NZD/USD

• NZD/USD based at 0.7291 after retreating from 0.7344 (Asia high)
• Kiwi also met headwind pre-0.7350 Aug 17-18, Aug 21-22 & Sept 8
• Large 0.7295 option expiry Tuesday, NZD 378mn strike
• NZ election Saturday: event risk currently looks close to call

FX OPTIONS

• Short dated USD vols propped in to FOMC, Thurs sees BoJ
• 1 week JPY vol break even 130 pips, 1mth settles 9.4. JPY call bias lower
• GBP vols hold firm after solid demand post MPC, GBP call bias 8yr high
• 1 month vol up 1.75 in a week, now captures key Oct inflation data
• NZD 1wk vol break even 113 pips over election, huge NZD vs AUD vol premium

COMMENT

UK data/Brexit speech may keep GBP volatility on boil

Sterling could be in for another lively week, courtesy of Wednesday’s release of ONS August retail sales data and UK PM May’s Friday Brexit speech in Italy. Better than expected retail sales figures would be a further boost for hawks advocating a 25bp BoE rate hike on Nov 2, and could lend the pound support. A miss would heighten fears of a further squeeze on UK household finances if/when the BoE hikes. A 0.2% rise in retail sales is the consensus forecast. In the wake of last week’s hawkish hold from the BoE, HSBC now expects the c.bank to raise rates in November and again in May 2018. May’s speech could be positive for sterling if she is perceived to have gone softer on Brexit than in prior speeches in January and last October. In contrast, the pound may suffer if her vision echoes that of Boris Johnson. Johnson was a high-profile Brexiteer during the referendum campaign.

CHART FOCUS

USD/JPY bulls brace for assault on 200-DMA

USD/JPY bulls are tightening their grip with scope to break above the 111.61 daily cloud top, which will unmask the 200-DMA at 112.27. If bulls manage to sustain a break above the 200-DMA, this will pave the way to 112.80–76.4% retrace of the 114.49 to 107.32 (July to September) drop. Fourteen-day momentum turned positive last week and has remained so, reinforcing the overall upside bias. The rebound persists from the recent overshoot to the downside which found support at the 2017 107.32 low. An element of caution is advised as the market is trading above the 30-day upper Bolli band, meaning near-term corrective moves can occur. Added to this are the diverging 30-day Bolli bands which highlight the scope for larger than usual ranges. A failure to register a series of daily closes above the 110.91/111.75 Fibonacci levels–50% and/61.8% of the same 114.49 to 107.32 fall–may see USD/JPY bulls run out of steam

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