FX Market Update 11-10

Market Briefs

• EUR/USD 0.06%, USD/JPY -0.2%, GBP/USD -0.11%, EUR/GBP 0.19%
• DXY -0.06%, DAX 0.1%, FTSE -0.04%, Brent 0.28%, Gold 0.2%
• UK preparing for no deal, but no spend on contingency arrangements yet -Hammond
• Early 2018 is crunch time for banks’ Brexit decisions – UK official
• Three quarters of Americans favor higher taxes for wealthy -Reuters/Ipsos poll
• Spain govt formally agreed to ask catalan govt if it had declared independence or not
• Japan Aug core machinery orders +3.4% m/m, +4.4% y/y, +1.1% and +0.8% eyed
• Japan government ups assessment of sector, picking-up, bodes well for CAPEX
• Oil rises on signs of tighter market, but 2018 looks more uncertain
• Gold prices hold steady ahead of Fed minutes

Looking Ahead – Economic Data (GMT)

• 07:00 MBA Weekly Mortgage Application Indices
• 10:00 JOLTS (Aug) (prev job openings level 6.170 mn (record high))
• 11:00 TR Ipsos PCSI (Oct) (prev 60.77)

Looking Ahead – Events, Other Releases (GMT)

• 11:15 FRB Chicago’s Evans discusses U.S. monetary policy in an era of low inflation; Zurich, Switzerland
• 15:45 FedTrade operation 30-year Ginnie Mae (max $1.25 bn)
• 17:10 New York Fed EVP Potter speaks on “American Exit Strategies”; New York, NY
• 18:00 FOMC Minutes (from September 19-20 meeting)
• 18:40 FRB San Francisco’s Williams speaks at community leaders event; San Francisco, CA
• 20:30 ECB Board Member Praet speaks in New York
• 01:10 FRB Atlanta’s Bostic speaks on balance sheet normalization; Hong Kong

Currency Summaries

EUR/USD

• EUR/USD 1.1796-1.1835 in Asia then higher to 1.1845 in Europe
• Influential sellers emerge & pair trades swiftly to 1.1802 before NA open
• Moves in bond markets & U.S. futures supported the early rise
• Continuing uncertainty in respect Catalonia is one factor weighing
• A top was likely given strength of technical resistance 1.1830-60
• Results of U.S. CPI Friday needed to determine bigger FX/rates moves

USD/JPY

• USD/JPY has relapsed from 112.58 to reach 112.19 on Wednesday
• Asia was a heavy net seller of USD/JPY once it peaked @112.58
• Offshore investor demand for Nikkei, currency hedges propped USD/JPY
• Conversely, London has been net a buyer of USD/JPY but it remains offered
• Japanese importers looking to buy sub-111, exporters sales from pre-113.00

USD/CHF

• USD/CHF lower on the day in line wth broader softer dollar
• 0.9740-0.9767 rise then lower to 0.9742 in Europe
• Back below 10-DMA 0.9747, close under opens the path for further weakness
• EUR/CHF erases gains and drops 1.1509 from early European 1.1539 high
• Above the 21-DMA at 1.1484 stays bullish but below opens up 1.14 again
• Touted official bid by 1.14 in EUR/CHF. Spike to 1.1389 Oct 2 short lived

GBP/USD

• Cable fell from 1.3211 to a low of 1.3176 during the European am
• 1.3176 was also pullback low from Tuesday’s Ldn am high of 1.3203
• EUR/GBP rose to 0.8968 European am high as Catalan tensions eased
• 0.8968 = highest level since Monday. Offers expected ahead of 0.90
• First PMQs since May’s Tory conference speech disaster 1100-1130GMT
• On Tues, May refused to say how she’d vote in another Brexit referendum

USD/CAD

• USD/CAD rose to an intra-day high of 1.2530 during the European am
• 1.2497-1.2521 was Asia range. 1.2555/58 & 1.26 are resistance levels
• FOMC minutes due 1800GMT. Fed rate hike expected Dec 13

AUD/USD

• Modest 20 pip range for AUD/USD during European am, 0.7775-0.7795
• Mooted bids at 0.7750 could prop pair if range base broken
• 0.7750 was Tuesday’s low. 0.7810 was six-day high in Asia
• China steel futures fell 2.5% to 2mth low in Asia, closed down 2.2%

NZD/USD

• NZ political uncertainty continues to weigh on the NZD
• NZ First’s coalition choice not expected before Friday at the earliest
• NZD/USD eased to an intra-day low of 0.7063 during the European am
• AUD/NZD rose to threaten 1.1022 during the European am
• 1.1022 = Tuesday’s high. 1.1022 = 61.8% of 1.1142-1.0827

FX OPTIONS

• Firmer EUR/USD sees pick up in vols and EUR call demand
• USD/JPY short dated risk skewed to downside, especially over elections
• Still 15bln USD/JPY expiries in 112-113 zone remaining this week to contain
• GBP vol/put setbacks limited with renewed GBP weakness expected
• NZD gamma bid in to coalition announcement. Strong NZD vol premium to AUD

COMMENT

Italy politics may ruffle euro’s post-Catalonia calm

Italian politics could soon be elbowing its way into the spotlight and impact the euro just as the political temperature in Catalonia cools. The Italian lower house of parliament is due to hold two confidence votes on Wednesday to try to force through an electoral law that is likely to penalise the 5-Star Movement (M5S), ahead of the national election due by May 2018. M5S is among Italian opposition parties keen on a parallel currency to flank the euro. Recently published data showed Italy’s Target 2 liabilities rose by 18.3 billion euros to a new record high 432.5bln in September. The liabilities are not an issue as long as Italy remains in the euro–an issue M5S has long been vocal about though last month it said a referendum on Italy’s membership of the euro is its “last resort”. The Nov 5 regional election in Sicily–a bellwether of Italian politics for decades, could provide clues ahead of the national election.

CHART FOCUS

USD/ZAR bears gain momentum after Tenkan break

USD/ZAR could see a deeper retreat to the 30-DMA at 13.3003 following Monday’s rejection from the upper 30-day Bollinger. Similar action was seen around the Bollinger on Sept 28, Oct 3 and 6. Pullbacks from these highs were previously held by the daily Tenkan line up until now. Downside pressures Wednesday has seen the price probe through the Tenkan line at 13.6475 which opens the path for a further slide. Monday’s Doji reversal was confirmed by a lower low and close Tuesday which fits with the view of a return to lower levels. Weekly charts show potential for the first bearish close since breaking into the cloud mid-September. The weekly cloud base is at 13.3138 and a break risks a drop to the key 200-WMA support level at 12.8486. Those short USD/ZAR are hopeful of a close under the Tenkan Wednesday to confirm the bear view, while a close back above suggests the bull run is not done yet

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