FX Market Update 29-9

Market Briefs

• EUR/USD 0.12%, USD/JPY 0.12%, GBP/USD -0.62%, EUR/GBP 0.75%
• DXY -0.07%, DAX 0.28%, FTSE 0.64%, Brent 0.14%, Gold 0.05%
• GB GDP YY Q2 1.5% vs 1.7%, 1.7% f’cast
• GB Nationwide house price YY Sept 2.0% vs 2.1%, 1.9% f’cast
• GB Mortgage Lending Aug 4.041B vs 3.584B, 3.600B
• EZ Flash Inflation YY Sept 1.5% vs 1.5%, 1.6% f’cast
• DE Retail Sales YY Real Aug 2.8% vs 2.8%, 3.2% f’cast
• DE Unemployment Rate SA Sept 5.6% vs 5.7%, 5.7% f’cast
• S&P says China’s debt growth to slow over next 5 years but remain elevated
• Oil mixed but set for weekly gain on improving market outlook

Looking Ahead – Economic Data (GMT)

• 12:30 CA GDP MM 0.1% f’cast, 0.3% prior
• 12:30 CA Producer Prices YY Aug 1.3% prior
• 12:30 US Personal Income (Aug) (mkt +0.2% m/m, prev +0.4% m/m)
• 12:30 US Consumption Expenditures (Aug) (mkt +0.1% m/m, prev +0.3% m/m)
• 12:30 US PCE Price Index (Aug) (prev +0.1% m/m, +1.4% y/y)
• 12:30 US Core PCE Price Index (Aug) (mkt +0.2% m/m; prev +0.1% m/m, +1.4% y/y)
• 13:45 US Chicago PMI (Sept) (mkt 58.5, prev 58.9)
• 14:00 US U of Mich Consumer Sentiment Index (final Sept) (mkt 95.3, prelim 95.3)
• 14:00 US U of Mich Current Conditions Index (final Sept) (mkt 113.7, prelim 113.9)
• 14:00 US U of Mich Expectations Index (final Sept) (mkt 83.2, prelim 83.4)

Looking Ahead – Events, Other Releases (GMT)

• 15:00 FRB Philadelphia’s Harker speaks at Fintech event; Philadelphia, PA
• 15:45 FedTrade operation 30-year Fannie Mae and Freddie Mac (max $1.925 bn)

Currency Summaries

EUR/USD

• EUR/USD crept up in early European trading to reach 1.1809 (range 1.1773-09)
• EZ flash inflation 1.5% in Sept vs 1.6% f/c, ex food/energy 1.3% vs 1.2% f/c
• EUR/USD dips a little after the inflation data
• Moderate dollar selling tipped for month-end rebalancing today
• Month-end EUR/GBP buying appears to have underpinned EUR/USD again today
• Given their close proximity EUR 1.2bn expiries @ 1.1800 may anchor spot

USD/JPY

• USD/JPY stuck in a 112.36-112.73 range
• Decent offers said up to 113.00 which may limit USD/JPY rise
• But there are a cluster of stops above 113.00 & also 113.30
• A decisive break above 113.00/30 will fuel rise towards 114 barriers
• Repeated failures above 112.80 Fibo means outlook is mixed
• Japanese importers are keeping spot afloat, shields Wed’s 112.23 low
• Expect more bids down close to 112.00 where a large Fri expiry resides

EUR/CHF

• Early European USD/CHF weakness limited ahead of 10-DMA (0.9683)
• Avg pierced briefly in Asia. 0.9692-0.9717 range in Europe
• USD/CHF gains as the dollar heads for its best weekly performance this year
• Eyeing Wed’s 0.9770 peak & 38.2% Fibo of the 2017 1.0335-0.9422 drop
• Also the Jun/Aug 0.9770/72 peaks and remains a tough level to crack
• EUR/CHF bid, probing the 21-DMA at 1.1461. 1.1443-1.1463 range
• Bulls still looking for a close above the average
• Swiss KOF indicator rises to 105.8 pts in Sept

GBP/USD

• GBP fell on the back of disappointing UK economic data at 0830GMT
• Q2 C/A deficit GBP 23.182bln vs 16bln f/c. July service sector output -0.2%
• Annualized UK Q2 GDP growth revised down from 1.7% to 1.5% too
• Cable down over half-a-cent to 1.3358. EUR/GBP up to threaten 0.8835
• 0.8835 = Monday high. 1.3343 = cable support, 61.8% of 1.3148-1.3659
• Aug net gilt purchases by foreign investors GBP 6.52bln vs -3.139bln in July

USD/CAD

• Quarter-cent range for USD/CAD thus far Friday, 1.2421-1.2446
• 1.2418 was Thursday’s low to follow Sept high of 1.2519
• Drop to 1.2418 influenced by quarter-end selling of the USD
• Canada GDP data due 1230GMT, July GDP f/c +0.1%

AUD/USD

• AUD/USD retreated to 0.7831 after threatening 0.7860 early Europe
• 0.7860 = Thursday’s recovery rally high from 0.7799 (10-week low)
• Mooted offers pre-0.79 may keep lid on AUD/USD if it vaults 0.7860
• Stops below 0.79 were tripped en route to 0.7860 low Tuesday

NZD/USD

• Large 0.7225 option expiry for NY cut is helping to anchor NZD/USD
• NZD 442mn strike. 0.7209-0.7229 was European am range
• AUD/NZD is consolidating losses from 1.0975 sub-1.09

FX OPTIONS

• Vols on the back foot across the board, not helped by China holiday’s
• 1 week expiry gets NFP now, but notable lack of risk premium
• USD/JPY election risk keeps 1mth risk reversals at highs since May for JPY calls
• EUR/USD vols at new post ECB lows, EUR calls relatively steady however
• NZD/USD vols have fully unwound pre election risk premium

COMMENT

Japan election poses serious risk for USD/JPY

USD/JPY options are showing market nerves about the Japanese snap election on Oct 22, with demand boosting vols and JPY calls to new cycle highs for any expiry falling after the event. PM Abe was expected to be a clear winner, but the rise of the new Party of Hope could dent his majority and this has helped fuel the recent demand for options/risk coverage. The 1-month expiry 25 delta risk reversals have been ramped to new highs for JPY calls since May at 1.65 from 0.6 early last week, despite USD/JPY trading new recent highs above 113.00. One-month implied vol paid to 10.3 (also a new cycle high) from 9.5. These gains go in hand with some sizeable demand for outright JPY call strikes with late October expiries down at 108.50 from 111.00. Forward vol estimates for overnight vol over the actual event have gained more than 10.0 vols this week to 30.0 vols or 140 pips break-even for straddles.

CHART FOCUS

USD/JPY bulls need a weekly close above 112.99 Fibo

USD/JPY bulls have managed to break the 112.99 this week — 61.8% retrace of the 118.66 to 107.32 fall — but a weekly close above this level is needed to keep the technical impetus on the upside. Once achieved, it could spur bulls to the 114.00 psychological level, then 114.33 — 61.8% retrace of the 118.66 to 107.32 fall — and the important July 114.49 peak. 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 in early September. The daily cloud, which currently spans 110.09-111.55, presents a decent bullish platform while the weekly cloud offers even greater support as it currently spans a wider 108.83-111.37 region. Therefore corrective moves are likely to be limited by the daily and weekly clouds, increasing the odds of an eventual weekly close above 112.99 and a significant drive higher.

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