FX Market Update 21-9

Market Briefs

• EUR/USD 0.17%, USD/JPY 0.24%, GBP/USD -0.03%, EUR/GBP 0.19%
• DXY -0.1%, DAX 0.32%, FTSE 0.09%, Brent -0.3%, Gold -0.51%
• S&P cuts China’s credit rating, citing increasing economic, financial risks
• Euro zone growth gaining momentum but inflation subdued: ECB Bulletin
• German economy to grow robustly in third quarter – finance ministry
• UK posts smallest August budget deficit in 10 years, sales tax revenues strong
• ECB to launch new reference rate after failed reform
• BoJ keeps to script, but new board member dissents as policy on hold
• WTO says global trade rebounding, sees 2017 growth of 3.6 pct
• Oil prices steady ahead of key OPEC meeting
• Gold hits over 3-wk low; strong dollar, Fed rate hike view weigh

Looking Ahead – Economic Data (GMT)

• 12:30 US Initial Jobless Claims (w/e Sep 16) (mkt 300k, prev 284k)
• 12:30 US Continued Claims (w/e Sep 9) (mkt 1.975 mn, prev 1.944 mn)
• 12:30 US Philly Fed Index (Sep) (mkt 17.2, prev 18.9)
• 13:00 US FHFA Home Price Index (Jul) (prev +6.5% y/y)
• 14:00 US Leading Indicators (Aug) (mkt +0.2% m/m, prev +0.3% m/m)
• 12:30 CA Wholesale Trade MM (Jul) (mkt -0.9%, -0.5% r’vsd)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $675 mn)
• 19:30 FedTrade operation 30-year Ginnie Mae (max $1.15 bn)

Currency Summaries

EUR/USD

• EUR/USD creeps a little higher from 1.1877 to 1.1919 in Europe
• Asia traded 1.1866-1.1907 after NA sold off 1.2035 to 1.1861 post-FOMC
• UST/Bund 10-year spreads narrow 4bp completely pricing out Fed move
• Philly Fed (17.2 f/c from 18.9) and U.S. LEI data (0.2% f/c) due today
• EUR 1.7bln 1.1925-1.1950 expiries may attract but also cap ahead 14GMT cut
• Resistance @ 200/100-HMAs 1.1949/57. Support @ Aug 31/Sep 9 lows 1.1823/37

USD/JPY

• USD/JPY rose from 112.19 to hit 112.72, before relapse
• 112.80 – 76.4% retrace of the 114.49 to 107.32 fall- weighs
• Japanese exporters are layered above, but not in large amounts
• Stops mixed in above 112.90, 113.00. Bids starts from 112.20
• BoJ Thursday keeps USD/JPY trajectory on the upside
• BoJ Policy Board leaves policy as is as eyed, 10-yr JGB target @zero%
• Short-term rate target @-0.1%, dissent on YCC, Kataoka, felt more needed
• BoJ asset buy program to remain, vote unanimous, Y80 trln/year pace

EUR/CHF

• Dollar extends gains vs CHF to new 0.9743 high after hawkish Fed
• 0.9718 Wed’s peak. Scope for extension to August’s 0.8772 peak
• Close to the 38.2% of the year’s 1.0335-0.9422 fall at 0.8771
• On the techs Wed close above 100-DMA was bullish. Now sppt at 0.9677
• EUR/CHF holding on to gains, 1.1545 to 1.1586 in Europe
• Tech resist is thin above here. 1.1671 is the 76.4% Fibo of 1.2650-0.8500
• Swiss reports trade surplus of CHF 2.17 bln in Aug

GBP/USD

• Cable met headwind pre-1.3516 after vaulting 1.3507 (Asia high)
• 1.3516 was pullback low from Wednesday’s Ldn am high of 1.3606
• Bids expected pre-0.8772 if EUR/GBP drops thru 0.8798 (Asia low)
• 0.8772 = 1.14 GBP/EUR. 0.8775/79 = recent 8wk lows
• UK Aug budget deficit smaller than expected, GBP 5.7bln vs 7.1bln f/c
• UK PM May to give key Brexit speech in Italy Friday

USD/CAD

• Offers above 1.2350 keeping lid on USD/CAD: 1.2355 = European am high
• 1.2354 was Asia high. 1.2350 option expiry Friday, USD 342mn strike
• More offers expected near 1.24: 1.2390 was 2wk peak Wednesday, post-Fed
• OPEC meeting in Vienna Friday. Poloz speaks next week (Sept 27)

AUD/USD

• AUD/USD dropped to threaten 0.7940 after recent longs unwound on Lowe
• Lowe said RBA has “considerable independence” re: rate hike timing
• RBA governor’s words were a reality check for Australian rate hawks
• 0.7940 was Monday’s low. 0.8105 was 12-day high Wednesday

NZD/USD

• NZD/USD elicited support at 0.7300 after retreating from 0.7334
• 0.7334 = early Europe high after poll said National 8.5% ahead of Labour
• Quarter-yard 0.7300 option expiry for 10am ET NY cut
• 0.7303 was Wednesday’s low–before surge to 7wk peak of 0.7435

FX OPTIONS

• Vols marginally lower after FOMC event risk pared
• EUR/USD options still biased higher however, risk reversals bid EUR calls
• GBP/USD Friday vol break even near 100 pips over key PM May Brexit speech
• NZD/USD Monday vol 92 pips, 1wk 115 pips break even over NZ election
• USD/JPY vols supported, JPY call risk reversal bias low since May, amid firmer spot

COMMENT

U.S rates low enough to fuel EM yield plays

Dollar funded carry trades look good value. Expectations for U.S. rate hikes have risen the most for 2017 this month but are still far lower than the Fed is predicting. The Fed sees a hike this year, three next and two in 2019. Fed funds have priced in 26bp of tightening this month so 51.5bp of hikes are priced for the next two years. Fed funds have been the more accurate indicator for rates so the push higher this month for the dollar versus higher yielding EM FX is likely an opportunity to sell. It’s certainly going to be a long time before U.S rates are high enough to make EM rates look unattractive. September’s USD rally has brought rare good value for yield hunters. USD/ZAR now 13.35 after a 5% lift will encounter strong resistance Jul/Aug highs 13.50-60. The daily Ichimoku cloud 3.5408-5610 and 200-DMA 3.5921 will weigh on USD/TRY (3.5%). RBI sold USDs today, USD/INR’s +1.5% September rise maybe worth selling into.

CHART FOCUS

USD/CHF bulls brace for assault on key 38.2% Fibo

The dollar has extended gains against the Swiss franc to a new 0.9743 high and key technical levels are in reach. There is scope for USD/CHF to rise to August’s 0.8772 peak next which is close to the 38.2% Fibo of the year’s 1.0335-0.9422 fall at 0.8771. The 38.2% retrace is the minimum technical requirement for a correction and those looking to play the USD/CHF long side again are hopeful of a move above the Fibo to pave the way to further gains. A close above the 38.2% could bring the 50% and 61.8% Fibos into play at 0.9878 and 0.9986, respectively. Wednesday’s close above the 100-DMA was another bullish signal, the last time the price closed above that average was back in May so the close helped strengthen upside sentiment. The 200-DMA is resistance further up at 0.9866

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