FX Market Update 20-9

Market Briefs

• EUR/USD 0.07%, USD/JPY -0.25%, GBP/USD 0.18%, EUR/GBP -0.11%
• DXY -0.08%, DAX -0.08%, FTSE 0.01%, Brent 1.11%, Gold 0.28%
• Fed conflicted by tepid U.S. inflation, global economic rebound
• OECD sees U.S. growth of 2.1% in 2017, 2.4% in 2018
• OECD forecasts Euro Zone growth of 2.1% in 2017, 1.9% in 2018
• OECD expects 2017 World growth of 3.5%, 3.7% in 2018
• German wholesalers expect revenues to hit record high in 2017
• UK Aug Retail Sales YY 2.4% vs 1.3%, 1.1% f’cast, 1.4% r’vsd
• UK Aug Retail Sales Ex-Fuel YY 2.8% vs 1.5%, 1.4% f’cast, 1.7% r’vsd
• JP Aug trade surplus Y113.6 bln, Y93.9 eyed, exports +18.1%, imports +15.2%
• JP Exports best since Nov ’13, to US +21.8%, China +25.8%, Asia +19.9%
• Japan end-June household financial assets Y1832 trln, +4.4% y/y
• GPIF net long Y1.353 trln foreign bonds end-June, short JGBs, stocks
• Oil set for strongest Q3 since 2004, Iraq hints at OPEC extension
• Gold inches up ahead of Fed policy statement

Looking Ahead – Economic Data (GMT)

• 11:00 MBA Weekly Mortgage Application Indices
• 14:00 Existing Home Sales (Aug) (mkt 5.46 mn SAAR, prev 5.44 mn SAAR)
• 14:30 EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

• 13:00 FOMC continues two-day policy meeting
• 18:00 FOMC Policy Statement and Summary of Economic Projections
• 18:30 Fed Chair Press Conference

Currency Summaries

EUR/USD

• EUR/USD trades a tight 1.1996-1.2016 range ahead today’s FOMC decision
• Anchoring effect due hedging EUR 1 billion vanilla option expiries @ 1.2000
• US rates up ahead Fed, 10’s UST/bund spread near recent highs circa 180bp
• Despite pressure from U.S. rate EUR/USD within 1% of 1.2092 trend high
• German PPI latest EZ data to underpin EUR, Aug PPI 2.6% from 2.3% yy July

USD/JPY

• USD/JPY capped by option related offers ahead of 112 barriers
• Wednesday’s range has been 111.25-111.65
• Initial line of offers where filled @ 111.80 on Tuesday
• Bulls are desperate for a daily close above 111.75 Fibo
• 111.75/112.00 region of supply could cause bulls to buckle
• There might be a test of decent bids between 111.00/111.20
• Below 111.00 could cause a deeper fall to 110.62 daily cloud base

EUR/CHF
• EUR/CHF off its best but retains a bid tone. 1.1565 was Tuesday’s peak
• 1.1565 high is highest since 0.85 low after SNB scrapped 1.20 floor in Jan ’15
• Tech resist is thin above here. 1.1671 is the 76.4% Fibo of 1.2650-0.8500
• Weekly Bolli at 1.1590 but market not shown much respect for envelope lately
• 1.1558-1.1523 today’s range for the cross. Tenkan line sppt @ 1.1464
• Would be a buyer of dips. Move back to old floor at 1.20 realistic
• Another session of consolidation for USD/CHF ahead of the Fed. 0.9631-0.9595
• Close inside the cloud Tues but back below today. Kijun threatened at 0.9594

GBP/USD

• Cable rose nearly a cent to 1.3606 on UK retail sales beat at 0830GMT
• Aug retail sales +1.0% vs +0.2% f/c, July revised up from +0.3% to +0.6%
• 1.3510-1.3537 was early Ldn range (pre-data). 1.3516 low since 1.3606
• Drop to 1.3516 influenced by report of suspicious package in City of Ldn
• EUR/GBP fell half-a-penny to threaten 0.8824 on UK retail sales beat
• 0.8824 = 61.8% of 0.8779-0.8898. Subsequent high 0.8884

USD/CAD

• USD/CAD fell to a low of 1.2236 during the European am
• 1.2236 = low water-mark since Monday’s Lane-spurred high of 1.2338
• AUD & NZD also on front-foot vs greenback pre-FOMC event risk

AUD/USD

• AUD/USD rose to test 0.8058 during the European am
• 0.8058 was Sept 11 Ldn am high. Stops are tipped above 0.8060
• AUD benefitting from carry trade-related demand after volatility lull
• VIX fell to 6wk low of 9.85 Tuesday. 0.8000 was AUD/USD low in Asia

NZD/USD

• NZD/USD rose to 0.7375 after 0600GMT release of Colmar Brunton poll
• Poll said National 9% ahead of Labour vs 4% deficit previously
• 0.7375 = high since Aug 7. Subsequent retreat based just shy of 0.7344
• 0.7344 was last week’s high. 0.7343 = Asia high (pre-election poll)
• NZ election Saturday. NZ Q2 GDP data due 2245GMT, +0.8% f/c

FX OPTIONS

• O/n vol break evens firm over FOMC, EUR/USD 18.0/90 pips, USD/JPY 19.0/88 pips
• GBP o/n was 113 pips before retail sales, marginally weaker since. 1wk 11.0/170 pips (9PM May speech Fri)
• O/n AUD and NZD break evens around 63 pips. CAD O/n break even nearer 90 pips
• Huge 30bln EUR/USD expiries 1.19-1.21 through end Sept, 1bln 1.20 today.
• USD/JPY vols off Tues highs as 112 barriers left intact. 1mth JPY call bias lows since May

COMMENT

Euro may fly if Germans favour CDU-CSU/FDP coalition

The euro could catch a bid on Monday if German voters open the door to a CDU-CSU/FDP coalition government. The odds of this are are a relatively long 4/1, according to Ladbrokes, so its impact could be all the greater for it. A surprise CDU-CSU/FDP coalition could boost the euro as it would mark a return to the pro-business tandem that ruled Germany for much of the post-war era. The most recent CDU-CSU/FDP coalition government ended after the 2013 federal election, when the FDP’s share of the vote dropped below the 5% Bundestag entry threshold. Ladbrokes quotes shorter odds of 11/4 for a ‘Jamaica’ coalition (CDU-CSU + FDP + Greens) while a third grand coalition between the CDU-CSU and SPD is 4/5 favourite. The latest polls suggest only another grand coalition or a ‘Jamaica’ coalition would have a stable majority in the Bundestag.

CHART FOCUS

USD/JPY risks drop to 110.00 as bulls struggle

USD/JPY risks a drop below 110.00 in coming days to the 30-DMA, now at 109.78, as supply around the 112.00 psychological level holds out. Bulls have been making a stab for the 200-DMA in recent days, currently at 112.22, but seem to be running out of momentum. Charts signaled a possible reversal lower after USD/JPY failed to register a daily close above 111.75 — 61.8% retrace of the 114.49 to 107.32 (July-September) fall — despite breaking above it on Tuesday. Another overbought sign is the fact that spot is trading circa the 30-day upper Bollinger band, now at 111.45. This is normally followed by mean reversion back to the aforementioned 30-DMA. USD/JPY bulls need a close above 111.75 and a break of the 112.00 level in order to keep the upward momentum alive and prevent a near-term collapse

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