FX Market Update 22-9

Market Briefs

• EUR/USD 0.3%, USD/JPY -0.41%, GBP/USD -0.18%, EUR/GBP 0.51%
• DXY -0.34%, DAX 0.33%, FTSE 0.26%, Brent 0.18%, Gold 0.42%
• Defying Trump, Iran says will boost missile capabilities
• N. Korea threatens H-bomb test in Pacific in response to Trump UN speech
• EZ Sep Markit Mfg Flash PMI 58.2 vs 57.4, f’cast 57.1
• EZ Sep Markit Serv Flash PMI 55.6 vs 54.7, f’cast 54.7
• EZ Sep Markit Comp Flash PMI 56.7 vs 55.7, f’cast 55.5
• DE Sep Markit Mfg Flash PMI 60.6 vs 59.3, f’cast 59
• DE Sep Markit Service Flash PMI 55.6 vs 53.5, f’cast 53.8
• DE Sep Markit Comp Flash PMI 57.8 vs 55.8, f’cast 55.8
• Euro zone banks must stop waiting for state help with bad loans: ECB
• “Debt trap” may paralyse central banks with fear – BIS
• OPEC panel to discuss export monitoring, oil pact extension
• UK’s May seeks Florentine renaissance for deadlocked Brexit talks
• Japan FinMin Aso: No decision yet to delay budget balancing goal
• IMF says BOJ should maintain stimulus, allow for delay in exit

Looking Ahead – Economic Data (GMT)

• 13:45 US Markit Manufacturing PMI (flash Sep) (mkt 53.0, prev 52.8)
• 13:45 US Markit Services PMI (flash Sep) (mkt 55.9, prev 56.0)
• 13:45 US Markit Composite PMI (flash Sep) (mkt 55.2, prev 55.3)
• 14:00 US Atlanta Fed Business Inflation Expectations (Sep) (prev +1.9% y/y)
• 15:15 US New York Fed Staff Nowcast for Real GDP (Q3) (prev +1.3% q/q AR)
• 15:15 US New York Fed Staff Nowcast for Real GDP (Q4) (prev +1.8% q/q AR)
• 18:00 US Baker-Hughes Weekly Oil Rig Count (prev 749; -7 w/w, +333 y/y)
• 12:30 CA CPI Inflation YY (Aug) (mkt 1.5%, prev 1.2%)
• 12:30 CA CPI BoC Core YY (Aug) (prev 0.9%)
• 12:30 CA Retail Sales MM (Jul) (mkt 0.1%, prev 0.1%)

Looking Ahead – Events, Other Releases (GMT)

• 13:30 FRB Kansas City’s George (non-voter, hawk) delivers keynote address at oil conference; Oklahoma City, OK
• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $2.225 bn)
• 17:30 FRB Dallas’s Kaplan (voter, centrist) participates in moderated Q&A session; Oklahoma City, OK
• —- UK PM May to give key Brexit Speech, Florence

Currency Summaries

EUR/USD

• Unexpected strength for eurozone PMIs lift EUR/USD to 1.2003
• German service sector PMI hits 77-month high. Manufacturing now 60.6
• French business activity hits 57.1 a more than 6-year high (f/c 54.8)
• EUR 1.4bln vanilla option expiries at 1.2000 likely behind resistance
• 76.4% retrace of September correction 1.2092-1.1837 @ 1.2032 looks key
• Yields rise in reaction. Bund yields more than match UST reaction to Fed
• Session low @ 1.1938 & 200-HMA @ 1.1945 are initial support

USD/JPY

• Talk of 113.00 barrier, scope for test but expect option-related offers
• 112.00 1.7B strike expiring Fri may delay gains until after NY cut
• Huge technical support in form of daily cloud underpins
• NK tension saw a dive to 111.65, but 111.59 pivot support held
• Drop in late Asia saw a liquidation of USD/JPY longs
• Japanese exporter sales noted but not heavy: offers start @112.50

EUR/CHF

• USD/CHF off its best, tracking EUR/USD. Tests 0.9669 fm Asia 0.9709 high
• The franc also benefiting from N.Korea tensions which weigh on risk
• 0.9748 fail Thurs came fm upper Bolli. Revision to 30-DMA 0.9618 possible
• Ahead, the 100/200-HMAs provide support at 0.9647/0.9630
• EUR/CHF keeps upside in focus, extends to new post-1.20 SNB floor break high
• 1.1623 tested in Europe from Asia 1.1564 low. 1.1586 early London low
• 1.1671 is the 76.4% Fibo of 1.2650-0.8500
• End to Libor won’t affect SNB’s monetary policy – SNB’s Moser

GBP/USD

• Cable met headwind pre-1.36 after vaulting 1.3586 in early Ldn trade
• 1.3586 was Thursday high as GBP rose on smooth/soft Brexit hopes
• PM May to give Brexit speech in Italy Friday (Brexit talks resume Monday)
• 1.3554 = low water-mark for cable since 1.36 threatened
• EUR/GBP up to 0.8849 on strong French/German PMIs. 0.8808 = Asia high
• Resistance levels include 0.8874 (100DMA) & 0.89. Key support 0.8772

USD/CAD

• USD/CAD fell half-a-cent to 1.2262 during the European am
• AUD & NZD also rose vs greenback during European am
• 1.2262 = low water-mark since Wednesday’s post-Fed high of 1.2390
• Canada Aug inflation data due 1230GMT, CPI f/c +1.5% yy vs 1.2% July

AUD/USD

• AUD/USD extended north from 0.7908 to 0.7977 during the European am
• 0.7908 was Sept low in Asia. Resistance levels include 0.7983/86 & 0.80
• 0.7983 = 38.2% of 0.8105-0.7908. Stops are tipped below 0.7900.

NZD/USD

• NZD/USD up half-a-cent since 0.7280 late Asia low
• Simultaneous gains for AUD vs USD
• NZ election Sat: 61+ seats for National would be best result for NZD bulls

FX OPTIONS

• GBP options well bid over PM May speech – Monday break even is 100 pips
• EUR/USD vols and risk reversals poised for further spot gains, huge 1.20 expiry
• Monday NZD/USD pricing 90 pips break even, AUD/NZD 120 pips over election
• USD/JPY circles huge 112 expiry. Vols propped – 1mth gets possible snap election

COMMENT

UK PM May could set cable trajectory towards 1.4000

British PM May not only has the potential to unlock fractured Brexit talks, but her widely-anticipated speech could also help out the BoE’s inflation targeting by setting cable on a path to 1.4000. Her speech Friday is expected to set out her vision for what a future relationship between the UK and the EU would look like and her wish for a transitional deal. Traders will be watch for signs that her vision of a trade agreement/single market access is plausible. If the speech is well received, then cable could well vault the 1.3669 Fibonacci level–38.2% retrace of the 1.7192 to 1.1491 (2014 to 2016) fall–unmasking the psychological 1.4000 level for an eventual test. Things are far from certain, however, with the option market asking for a very high premium for Monday GBP vols of almost 100 pips break-even for a straddle. The stakes for the UK and the pound are very high.

CHART FOCUS

EUR/USD bulls running out of time to avert a slump

EUR/USD bulls are racing against time to force a close above the 1.2097 Fibonacci level at the end of September–38.2% retrace of the 1.4940 to 1.0340 (2011 to 2017) fall–in order to keep the overall upside bias. While there have been several attempts to break 1.2097 in August and September, these have been unsuccessful, with the highest achieved at 1.2092 on Sept 8. It is increasingly likely bulls will fail to overcome 1.2097 in the medium-term, this will add to the downward pressure in October. EUR/USD could fall to the 1.1678 Fibonacci level–23.6% retrace of the 1.3040 to 1.2092 (2017) rise–as bulls begin to buckle under their own weight. The market is trading above the 30-month upper Bollinger band currently at 1.1821, which by itself points to an overshooting market.

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