FX Market Update 28-9

Market Briefs
• EUR/USD 0.21%, USD/JPY -0.02%, GBP/USD -0.12%, EUR/GBP 0.27%
• DXY -0.01%, DAX 0.29%, FTSE 0.03%, Brent 0.86%, Gold 0.13%
• EZ Economic Sentiment Sept 113.0 vs 111.9, 112.0 f’cast
• EZ Business Climate Sept 1.34 vs 1.09, 1.08 r’vsd, 1.11 f’cast
• EZ Consumer Conf. Final Sept -1.2 vs -1.2, -1.5 r’vsd, -1.2 f’cast,
• Japan calls snap election as new party roils outlook
• Carney: BoE can’t be expected to nullify Brexit hit to economy
• ECB’s inflation objective should be symmetrical: Liikanen
• ECB to discuss adjusting, not ending stimulus: Praet
• Fitch says ANC infighting to hit South Africa growth
• Oil steadies as North Iraq, Kurdish pipeline stays open
• Gold hits over 1-month low; palladium races past platinum

Looking Ahead – Economic Data (GMT) 

• 12:30 US Initial Jobless Claims (w/e Sept 23) (mkt 270k, prev 259k)
• 12:30 US Continued Claims (w/e Sept 16) (mkt 1.990 mn, prev 1.980 mn)
• 12:30 US Real GDP (final Q2) (mkt +3.0% q/q AR, prev +3.0% q/q AR)
• 12:30 US Real Final Sales (final Q2) (mkt +3.0% q/q AR, prev +3.0% q/q AR)
• 12:30 US Core PCE Price Index (final Q2) (mkt +0.9% q/q AR, prev +0.9% q/q AR)
• 12:30 US Advance Goods Trade Balance (Aug) (prev adv $65.1 bn)
• 12:30 US Advance Wholesale Inventories (Aug) (prev adv +0.4% m/m)
• 12:30 US Advance Retail Inventories (Aug) (prev adv -0.2% m/m)
• 15:00 US KC Fed Manufacturing Composite Index (Sept) (prev 16)

Looking Ahead – Events, Other Releases (GMT) 

• 13:45 FRB Kansas City’s George on monetary policy at minority bankers conference; Kansas City
• 14:00 Fed Vice Chair Fischer on Developments in Central Banking; London
• 15:45 FedTrade operation 15-year Fannie Mae and Freddie Mac (max $500 mn)
• 18:30 FedTrade operation 30-year Ginnie Mae (max $1.25 bn)

Currency Summaries
EUR/USD 

• EUR/USD 1.1722-75 in Europe. Low matches top daily Ichi cloud
• Mixed bag for German CPI. Two states at or above ECB’s 2% target
• Month-end EUR/GBP buying seen partly behind EUR gains today
• German institutes say ECB should prepare to exit ulra loose policy
• ECB’as Praet says talking about recalibration not exit

USD/JPY 
• Japanese exporter sales on rallies above 113 weigh, 113.21 the high
• Recall the Asia low was 112.71, Japanese importers bids start @112.70
• So far the fall has hit a marginally new session low at 112.69
• Break above Wed’s 113.26 high & 113.30 pivot will be a bullish sign
• Traders should beware that large 112 expiries may attract
• There are 2.1B worth of 112s strikes rolling off at the NY cut Thu
• Another 1B worth will expire on Fri. A dip could make these magnetic

EUR/CHF
• USD/CHF off its best but retains a bid. 0.9757 high Thurs vs 0.9770 Wed
• 0.9770 is key resist incl the 38.2% Fibo of the 2017 1.0335-0.9422 drop
• Also the Jun/Aug 0.9770/72 peaks and a tough level to crack
• Stops tipped above 0.9770-75, & again above 0.98. Techs eye 200-DMA at 0.9851
• 1.1416-65 range for the cross above this wk’s 1.1408 low. Bid today in Europe
• Testing 21-DMA but bulls would need a close above

GBP/USD 
• Month-end buying has fuelled EUR/GBP rise to 0.8810 (3-day high)
• 0.8761 was Asia low. 0.8747 was Wednesday’s 10-week low
• Cable fell to 2-week low pip shy of 1.3343 during the European am
• 1.3343 = 61.8% of 1.3148 (Sept 14 low) to 1.3659 (Sept 20 high)
• UK Q2 C/A deficit will be revealed Friday: GBP 16bln f/c

USD/CAD 
• USD/CAD met headwind just shy of 1.2521 after extending north early Ldn
• 1.2521 = 76.4% of 1.2663 (Aug 31 high) to 1.2063 (Sept 8 low)
• Profit-taking on longs influenced retreat from pre-1.2521 high to 1.2470
• 1.2470 was Asia low. 1.2336 was Wednesday’s low, before dovish Poloz
• 31% probability of BoC rate cut Oct 25-BOCWATCH/Eikon. 40% pre-Poloz

AUD/USD 
• AUD/USD extended south to a 10wk low of 0.7799 during the European am
• Decline influenced by plunge in China steelmaking futures
• Dalian iron ore closed down 3.5%, coke closed down 6%
• Profit-taking on shorts aided rise from 0.7799 to threaten 0.7836
• 0.7836 was Wednesday’s low. 0.7856 was Asia high

NZD/USD
• NZD/USD topped out 5 pips shy of 0.7210 after rallying off 0.7167
• 0.7210 expiry for NY cut, NZD 335mn strike. 0.7167 = early Europe low
• 0.7233 was Asia high. 0.7169 was Tuesday’s low

FX OPTIONS 
• Election risk fuelling demand for USD/JPY vols and JPY calls last 24 hours
• 1 month expiry vol and risk reverals at cycle highs, despite firmer USD/JPY
• EUR/USD vol setbacks run in to relative value buyers. EUR calls still bid
• Cable vols ease, 1mth almost retraces pre-post MPC gains from 7.5 to 9.25
• CAD vols ease after dovish Poloz dents Oct rate hike odds
• NZD vols extend post election setbacks after RBNZ, close gap to AUD vols

COMMENT
ECB – Praet wants to call it recalibration

When the ECB announces another reduction in monthly purchases at its October meeting it wants everyone to call it a recalibration. This will likely be the buzzword as the ECB looks to play down expectations that the destination of policy is toward an exit. This was the rationale behind Draghi describing the lowering of monthly purchases to €60bn from €80bn in Dec 2015 as an adjustment and not tapering. Back then, Draghi said that tapering implied a predetermined path toward an end and the ECB does not want us to think that stimulus has come to an end. In his Sintra speech Draghi highlighted how a recovering economy would require an adjustment in policy instruments not to “tighten the policy stance, but to keep it broadly unchanged”. This is a day for positive spin with Praet wanting us to call it a recalibration while BoE’s Haldane describing a rate hike as a “good news story”. Next it will be traders justifying a loss as the market teaching me a valuable lesson or even worse that the market was wrong.

CHART FOCUS
USD/ZAR bulls brace for a run at 14.00

Technicals suggest that USD/ZAR could extend its bull run above 14.00 following its impressive climb into the weekly cloud. USD/ZAR has not traded inside the cloud in over a year making the break pretty significant in itself, but Friday’s close is more important to see if the break can be sustained. If this is the case, then a further rise to test the cloud top at 14.1513 looks likely. This week’s rally has left USD/ZAR heavily overbought on the daily charts and above the upper 30-day Bollinger. Historically, the Bollingers contain action and price does not stray far, or for long, outside this pattern. So those not already long can use the opportunity of pullbacks to rejoin the trend at better levels. The upper Bollinger continues to rise at 13.5266 today and would be a good level to place a bid. Only a break back below the 200-DMA at 13.2214, also close to the daily cloud top, would deter the bulls at this stage.

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