FX Market Update 10-10

Market Briefs

• EUR/USD 0.42%, USD/JPY -0.28%, GBP/USD 0.38%, EUR/GBP 0.08%
• DXY -0.33%, DAX -0.05%, FTSE 0.21%, Brent 0.93%, Gold 0.51%
• DE Aug Trade Balance, EUR, SA 21.6B vs 19.5B, f’cast 20.0B, r’vsd 19.3B
• GB Sept BRC Retail Sales YY 1.90% vs 1.30%
• GB Aug Construction O/P Vol YY 3.5% vs -0.4%, f’cast 0.2%, r’vsd 2.7%
• GB Aug Industrial Output YY 1.6% vs 0.4%, f’cast 0.8%, r’vsd 1.1%
• GB Aug Manufacturing Output YY 2.8% vs 1.9%, f’cast 1.9%, r’vsd 2.7%
• GB Aug Goods Trade Balance GBP -14.24B vs -11.58B, f’cast -11.20B, r’vsd -12.83B
• China says will have no problem meeting 2017 growth target, may beat it
• BOJ Governor Kuroda pledges to stick with quantitative easing

Looking Ahead – Economic Data (GMT)

• 10:00 US NFIB Small Business Optimism Index (Sep) (prev 105.3)
• 12:15 CA Sept House Starts, Annualized f’cast 210k, prev 223.2k
• 12:55 US Redbook Same-Store Sales Index (weekly) (+4.1% w/w)

Looking Ahead – Events, Other Releases (GMT)

• 14:00 FRB Minneapolis’s Kashkari speaks at regional economic conditions conference; Minneapolis, MN
• 16:00 Catalonia regional leader Carles Puigdemont to address a session
• 18:30 FedTrade operation 15-year Fannie Mae and Freddie Mac (max $500 mn)
• 00:00 FRB Dallas’s Kaplan participates in moderated Q&A session; Stanford, CA

Currency Summaries

EUR/USD

• Mon’s hawkish ECB Lautenschlaeger boosts EUR/USD in Asia (range 1.1740-80)
• Europe adds to those gains slightly reaching 1.1789
• Weaker USD/CNY influences lower USD/EM. Weighs slightly big USD
• EUR dips on unexpectedly soft French IP which fell 0.3% vs +0.4% f/c
• Strong industrial output (5.7% yy vs 2.8% f/c) later boosts EUR
• No U.S. data to influence proceedings today. EUR 580mn expiries @ 1.1750

USD/JPY

• USD/JPY slips from 112.83 to break 112.40 where a pivot point resides
• USD/JPY bears seem to be homing in on Sep 29 112.22 low, 112.27 lowest
• Scope for losses to the 112.00 psychological level if 112.22/32 breaks
• Heavy trading volume in the 112.60s means tough to get back above there
• Failure above 113 heightens downside risk
• Spot heavy as NK threat lurks in the background

USD/CHF

• USD/CHF was a little lower Tuesday in Europe, 0.9790-0.9770
• Prior highs/prev 38.2% Fibo at 0.9770 came back under pressure but hold
• Broader uptrend intact but below the 10-DMA at 0.9746 risks a deeper slide
• Bulls need a break of the 200-DMA at 0.9830 and Fri’s 0.9840 peak
• EUR/CHF continues to rise, new rebound high at 1.1525 late Asia/early Europe
• Now a little easier, 1.1525-1.1511, but holds above pivotal 21-DMA at 1.1482
• Not much resistance until the 1.1588 Sep 25 German vote collapse day high
• Swiss headline jobless rate flat at 3.0 pct in Sept

GBP/USD

• Cable rose to a high of 1.3203 on better than expected UK output data
• Aug construction output +0.6% vs flat f/c. Mfg output +0.4% vs +0.2% f/c
• Annualized industrial output +1.6% vs +0.8% f/c. 1.3186 = pre-data high
• Offers expected near 1.3220 (stop-loss city after 1.3220 break Oct 5)
• 1.3200 & 1.3210 option expiries today & Thursday, GBP 871mn strikes
• Fifth round of Brexit talks continue today. EU summit next week

USD/CAD

• USD/CAD has fallen to 1.2495 from 1.2555 (Asia high)
• 1.2527-1.2558 was Monday’s range (Canada holiday Monday)
• Canada Sept housing starts data due 1215GMT, 210k f/c
• Canada Aug building permits data due 1230GMT, -1% f/c
• Large 1.2500 option expiry Thursday, USD 749mn strike

AUD/USD

• AUD/USD met headwind pre-0.78 after its early Ldn break thru 0.7790
• 0.7797 = early Ldn high. 0.7798 = Oct 6 high. 0.7790 was Asia high
• More offers expected near 0.7820, 23.6% of 0.8105 (Sept 20 top) to 0.7733

NZD/USD

• AUD/NZD extended north to test 1.1022 in early European trade
• 1.1022 = 61.8% of 1.1142-1.0827 (Sept range). 1.1020 was Monday’s high
• NZD/USD respected its 0.7056-0.7088 Asia range thru the European am
• NZ First leader Peters says won’t announce coalition choice on Thursday
• Also refused to be drawn on whether to expect an announcement by Friday

FX OPTIONS

• NZD related short dated vol gains highlight coalition concerns
• Japan election favours risk revesals to hedge low tail risk
• USD/JPY vols at m-term lows as 20bln 112-113 expiries contain spot
• GBP vols/puts peak but setbacks limited, with GBP bias still lower
• EUR/USD vols languish at post ECB setback lows. No Catalonia risk premium

COMMENT
China FX policy unlikely to bow broader USD for long
China’s FX policy is unlikely to lead the broader dollar lower for long as authorities seem less inclined towards a stronger currency. Wider USD/EM is also likely to track rising U.S. rates. After a week-long Chinese holiday when USD rose broadly, a higher USD/CNY was logical when markets reopened. Instead, the pair has moved swiftly lower, seemingly influenced by the authorities. It’s prudent to bet this is no sea-change in thinking over currency, but a move inspired by rapid fluctuations in CNY’s value. The CNY’s rapid rise was vocally opposed by China when USD/CNY was in the low to mid-6.40s. With investors holding large yuan longs, the following USD/CNY rally unfortunately proved just as rapid as the prior fall. This seems to have inspired a more covert operation to lift the CNY. Given the clear message about CNY gains only a month ago, when USD/CNY was less than 2% from current levels, it’s sensible to assume China wants less volatility not a stronger currency.

CHART FOCUS
GBP/CHF set to charge higher, upper Bolli beckons
Technicals favor a GBP/CHF return towards the upper 30-day Bollinger at 1.3292 following the rebound from the 30-DMA. Friday and Monday saw the price spike just under the average but close back above and subsequently climb to test 1.2904 on Monday. The cross holds close to the high on Tuesday, and also Tenkan and 38.2% Fibo at 1.2912/1.2915. 1.2915 is the 38.2% Fibo retracement of the 1.3196-1.2742 September to October drop. The 38.2% retrace is the minimum technical requirement for a correction and those looking to play the GBP/CHF long side again are hopeful of a move above the Fibo to pave the way to further gains. A close above the 38.2% could bring the 50% and 61.8% Fibos into play at 1.2969 and 1.3023, respectively. On a note of caution, keep an eye on the 30-DMA, now support, at 1.2802 as a close under the line risks further weakness and would deter the bulls

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