FX Market Update 5-10

Market Briefs

• EUR/USD -0.03%, USD/JPY -0.13%, GBP/USD -0.45%, EUR/GBP 0.45%
• DXY 0.08%, DAX -0.22%, FTSE 0.18%, Brent 0.72%, Gold 0.3
• ECB’s Nowotny expects asset purchases to slow at start of next year -Trend
• ECB lowers emergency funding cap for Greek banks to 32.6 bln euros
• German firms must ready for very hard Brexit, says industry group
• Swiss CPI rises to 0.7% y/y from 0.6%, a 6-year best
• A Sky News report said May is not considering resigning
• After speech fiasco, UK minister says ruling Conservatives must stay cool
• Oil steady as talk of new OPEC deal balances U.S. exports
• Gold little changed in quiet trade ahead of U.S. jobs data

Looking Ahead – Economic Data (GMT)

• 11:30 US Challenger Job Cuts (Sept) (prev 33,825)
• 12:30 US Initial Jobless Claims (w/e Sept 30) (mkt 265k, prev 272k)
• 12:30 US Continued Claims (w/e Sept 23) (mkt 1.950 mn, prev 1.934 mn)
• 12:30 US International Trade (Aug) (mkt -$42.7 bn, prev -$43.7 bn)
• 12:30 CA Trade Balance C$ (Aug) (mkt -2.60B, prev -3.04B)
• 14:00 US Factory Orders (Aug) (mkt +1.0% m/m, prev -3.3.% m/m)
• 19:00 US Treasury STRIPS (Aug)
•     n/a US Chain Store Sales (Sept)

Looking Ahead – Events, Other Releases (GMT)

• 13:00 FRB Williams addresses community banking conference; St. Louis, MO
• 13:10 Fed Governor Powell addresses Treasury Market Practices Group; New York
• 14:00 FRB Harker speaks at workforce conference; Austin, TX
• 15:45 FedTrade operation 30-year Ginnie Mae (max $1.25 bn)
• 20:30 FRB George speaks at workforce conference; Austin, TX

Currency Summaries

EUR/USD

• EUR/USD 1.1748-79 range in Europe (1.1747-88 in NA yesterday)
• Activity suppressed by event risk thanks to U.S. jobs report tomorrow
• Option expiries: EUR 588mn 1.1735-50 & EUR 547mn 1.1775-1.180
• US trade & initial claims data @ 12.30GMT. Unlikely to spark much movement

USD/JPY

• USD/JPY slips in London to 112.56 from the 112.92 Asia high
• Offers remain intact ahead of 113.00, these are a limiting factor
• Intra-day bears manage to register an hourly close below 112.67 pivot
• Despite weakness, downside limited as solid support in place
• Support all the way down to 200-DMA @111.95
• Bulls continue to eye moves above 113.30 were stops are clustered
• Don’t expect fireworks if 113.30 breaks as market is long gamma

EUR/CHF

• EUR/CHF is back above the 21-DMA at 1.1470 but bulls require close above
• Tenkan/Kijun in focus at 1.1488/1.1493. 1.1459-1.1484 rise after Swiss CPI
• Techs sppted by thick rising cloud. Another stab at 1.16 region likely
• Sept 22 1.1623 top = post-1.20 SNB floor break high & initial upside target
• USD/CHF a little higher as the dollar inches up across the board
• 0.9744-0.9760 range, but below Tuesday’s 0.9787 peak
• 10-DMA downside prop. 0.9771 38.2% Fibo of 2017 1.0335-0.9422 drop remains key
• Bulls looking for a close above Fibo for a chance at the 200-DMA at 0.9840

GBP/USD

• GBP took an early Europe hit on speculation about UK PM May
• Cable tripped stops below 1.3220 en route to 1.3175 (3wk low)
• EUR/GBP tripped stops above 0.8900 en route to 0.8934 (3wk high)
• Ladbrokes quotes even money on May exit within a year
• BoE MPC hawk McCafferty slated to speak in Ldn at 1600GMT

USD/CAD

• USD/CAD eased to 1.2463 after threatening 1.2490 early Europe
• 1.2490 = Asia high. Parameters within 1.2449-1.2500 Wednesday range
• WTI continues to trade around 50 bucks/barrel
• Canada Aug trade data due 1230GMT, Canada jobs data due Friday
• 13% of BoC 25bp hike Oct 25 vs 40% before dovish Poloz steer last week

AUD/USD

• Mooted bids near 0.7800 may prop AUD/USD if it extends south from 0.7865
• 0.7818 was European am low. 0.7865 was Asia high, pre-Aussie data shock
• Mooted bids near 0.7800 may include option-related interest
• Large 0.7800 expiry Friday, AUD 1bln strike. Quarter-yard 0.78 expiry Thursday

NZD/USD

• NZD/USD respected its narrow 0.7146-65 Asia range thru the European am
• 0.7146 = fractionally fresh 1mth low (0.7147 was Wednesday’s low)
• AUD/NZD down to 1.0930 on shock 0.6% decline in Australian retail sales
• Cross was threatening 1.10 before data surprise (sub-1.10 since Sept 15)

FX OPTIONS

• O/n vols(next day expiry) get NFP, but risk premiums minimal
• Recent poor weather gives Sept numbers less credence
• EUR/USD O/n vol 11.0/54 pips, USD/JPY 12.5/59 pips, Cable 12.0/66 pips
• AUD/USD 11.5/37 pips. USD/CAD (double payroll) 11.5 or 60 pips
• Vols broadly heavy as most spot markets sit back in familiar ranges

COMMENT

UK PM May exit could spur steep sterling fall

Sterling could take a hit if May resigns or is toppled as UK PM/Tory party leader as it would add another layer of uncertainty to Brexit negotiations. Speculation about May’s future hurt the pound in early European trade Thursday, with EUR/GBP rising half a penny to a three-week high of 0.8934 and GBP/USD falling half a cent to a three-week low of 1.3175. A Sky News report Thursday said May is not considering resigning. Ladbrokes quoted even money on May being replaced as Tory party leader within a year after her calamitous keynote speech at the Tory party conference Wednesday. Brexiteers Boris Johnson and Jacob Rees-Mogg are two of the names-in-the-frame to succeed May: if either got the job the pound could tank on expectations of a hard Brexit. A new Tory leader/PM would also increase the risk of another UK general election as early as 2018 or 2019. The next round of Brexit talks are scheduled to begin next week.

CHART FOCUS

Cable technical picture deteriorates further

Cable risks further falls after it broke some key technical levels this week. The 61.8% Fibo of the August to September 1.2774-1.3659 rise at 1.3112 is the next port of call for GBP/USD bears following the break of the 50% at 1.3217 on today’s drop to a fresh 3 week low at 1.3175. A break and close under the Fibo could trigger a full retracement to the 1.2774 Aug 24 rally origin. The fall to 1.3175 also puts cable below the 30-DMA at 1.3240, where a close beneath could see a further downward extension to the lower Bollinger around that average at 1.2786. The move back below the weekly cloud top at 1.3257 on Tuesday is also adding to the downward pressure. A close below there Friday is required to increase the significance of the break but such action could prompt a deeper retreat through the cloud. The base, at 1.2477, is an ambitious but realistic target. Naturally some form of corrective action is likely but the bear trend remains alive while the market holds below converged 10/21-DMAs at 1.3361/64.

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