FX Market Update 27-9

Market Briefs

• EUR/USD -0.34%, USD/JPY 0.57%, GBP/USD -0.26%, EUR/GBP -0.07%
• DXY 0.41%, DAX 0.49%, FTSE 0.15%, Brent -0.68%, Gold -0.28%
• China says military means not an option to resolve Korea situation
• German FDP demands policy change as price for coalition with Merkel
• Two worlds of Labour, Britain’s opposition party struggles to unite
• German exporters unfazed by stronger euro, car sector less upbeat – Ifo
• Oversized European banking sector likely to shrink: ECB’s Nouy
• UK retail sales growth spikes higher in September – CBI
• EZ Aug Money-M3 Annual Grwth 5.0% vs 4.5%, f’cast 4.6%
• Brent oil eases but remains in sight of 2015 highs
• Gold edges down as dollar gains on Fed rate hike view

Looking Ahead – Economic Data (GMT)

• 11:00 MBA Weekly Mortgage Application Indices
• 12:30 Revised Building Permits (Aug) (prelim 1.300 mn SAAR, +5.7% m/m)
• 12:30 Durable Goods Orders (Aug) (mkt +1.0% m/m, prev -6.8% m/m)
• 12:30 Durable Goods Orders ex-Trans (Aug) (mkt +0.2% m/m, prev +0.6% m/m)
• 12:30 Nondefense Capital Goods Orders ex-Aircraft (Aug) (mkt +0.3% m/m, prev +1.0% m/m)
• 14:00 Pending Home Sales Index (Aug) (mkt 108.6, -0.5% m/m; prev 109.1, -0.8% m/m)
• 14:30 EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

• 13:15 FRB Minneapolis’s Kashkari gives welcoming remarks; Minneapolis, MN
• 13:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.625 bn)
• 17:30 FRB St. Louis’s Bullard discusses the economy and monetary policy; Kirksville, MO
• 18:00 Fed Brainard speaks on “Labor Market Disparities and the Mission of the Fed”; Kansas City, MO
• 23:00 FRB Boston’s Rosengren speaks at NYU Money Marketeers; New York, NY

Currency Summaries

EUR/USD

• EUR/USD down to 1.1731 as US 10 yr yield rises 6bp to 2.30%
• Higher bund yield ignored but actually outstripped UST rise
• Euro zone M3 jumps to 5% (ECB ref rate is 4.5%)
• EUR/USD finds support ahead daily cloud top 1.1725 & 200-WMA 1.1721
• Europe’s range 1.1731-95. US durable goods in focus next
• In August terrible durables data sparked a big EUR/USD rally

USD/JPY

• Risk-on market sees USD/JPY reach 112.96, up from 112.23 session low
• Good demand at Tokyo fix, spot date is month & Japan fiscal half-ends
• Focused on the 113 level where barriers reside
• Note there is a huge Fibonacci level just below @112.99
• Japanese exporters with offers ahead of 113, but stops said above
• Beware large (2B) 112.00 strike expiring on Thu could delay rise
• Tokyo Gov Koike announces manifesto for new Hope Party, to rival Abe’s LDP

EUR/CHF

• EUR/CHF a little higher (1.1438-60). Rise capped near 21-DMA at 1.1462
• Stops are touted sub 1.14. 1.1408 was Tues low. EUR/USD weakness exp to weigh
• Sept 1.1362 base & 38.2% fibo of post-Brexit 1.0623-1.1623 at 1.1241 supports
• USD/CHF remains bid, continues to track EUR/USD. 0.9715-0.9764 range Europe
• Break of double day high at 0.9747/48 (Mon/Thurs) eyes 200-DMA at 0.9854
• Swiss investor sentiment indicator rises to 28 pts in Sept

GBP/USD

• Cable tested 1.3365 after tripping stops below 1.3400 & 1.3382 early Ldn
• 1.3365 = 100WMA (recently vaulted for 1st time since Oct 2014)
• USD benefitting from Trump tax reform hopes
• EUR/GBP topped out a pip shy of 0.8800 after rising as cable fell
• 0.8800 was Tuesday’s high–before drop to 0.8755 (10-week low)
• 0.8763 = cross low since 0.8800 threatened. 0.8760 was Asia low

USD/CAD

• USD/CAD rose to test 1.2413 (Tues 20-day high) during the European am
• Gains precede Poloz speech about “Data Dependence” at 11.45am ET
• Speculation Poloz may echo recent Lane steer about BoC watching CAD
• 1.2370 was Asia high after news US slapped steep duties on Bombardier
• Pre-Poloz: 37% probability of 25bp BoC hike Oct 25-BOCWATCH/Eikon

AUD/USD

• AUD/USD extended south to a 6wk low of 0.7836 during the European am
• Losses influenced by USD-positive US tax reform hopes
• 0.7860 (Tuesday’s low) is now a resistance level

NZD/USD

• NZD/USD is consolidating recent losses amid NZ political stalemate
• 0.7178 = European am low. 0.7169 was Tuesday’s 3wk low
• AUD/NZD retreated to 1.0900 during the European am
• Stops above 1.0900 were tripped earlier this week (Monday)

FX OPTIONS

• Firmer USD after hawkish Yellen Tues and impending Trump tax plan today
• G10 vols mostly weaker since Tuesday and mild recovery in USD call bias
• EUR/USD risk reversals still bid topside. Vols softer, 1mth propped by ECB
• USD/JPY vol setbacks stalled as 113 barriers threatened. JPY call bias holds
• GBP/USD 1mth vol back at 8.0 after pre/post MPC gains from 7.5 to 9.25
• RBNZ break even just 56 pips, with nothing expected, NZD vols softer
• 1mth USD/CAD vol 8.0-8.9 since BoC capture Tues. Poloz speaks later

COMMENT

Perfect GBP storm if Britons vote in 2018 or 2019

Sterling could be in for yet more volatility through the next UK general election campaign–especially if that vote is held in 2018 or 2019. “Labour preparing for run on the pound, admits Corbyn” is the headline of a front-page article in The Times Wednesday that’s fueling election speculation. It comes after Corbyn’s shadow Chancellor reportedly said Labour has got to “scenario plan” for the possibility of a run on GBP if Labour wins power. It is by no means certain Labour will win power at the next election–and this uncertainty could make pound price action even livelier through the vote. Ladbrokes quotes the same 2/1 odds for Labour to win a majority at the next election as the Tories, with a hung parliament the marginal 7/4 favourite. The next election is provisionally scheduled for 2022, but Paddy Power quotes relatively low odds of 9/4 for it to be held as early as 2018 and 2/1 for 2019. Those low odds reflect expected stress from ongoing Brexit negotiations with a minority Tory government reliant on the support of the DUP.

CHART FOCUS

USD/JPY bulls seek 113.00 break to pave way to 115.00

USD/JPY bulls are tightening their grip but have to surmount a clutch of key technical levels before setting sight on the 115.00 psychological level. A break and weekly close above 112.99/113.00 will pave the way to 114.33 — 61.8% retrace of the 118.66 to 107.32 fall — and the important July 114.49 peak. Before that, USD/JPY bulls have to break 112.99 — 50% of the same 118.66 to 107.32 drop — which will unmask the important 113.00 psychological level just above. There has been a steady recovery after support was found at the 107.32 low and a bear trap was registered below the weekly cloud early September. The daily cloud, which currently spans 110.15-111.55, is offering huge support. Therefore corrective moves are likely to be limited but a bears will be hoping for a daily close back within the daily cloud in order to delay gains

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