FX Market Update 12-10

Market Briefs

• EUR/USD -0.03%, USD/JPY -0.12%, GBP/USD -0.31%, EUR/GBP 0.26%
• DXY 0.05%, DAX -0.03%, FTSE 0.18%, Brent -0.9%, Gold 0.23%
• EZ Aug Industrial Production YY 3.8% vs 3.2%, f’cast 2.6%, r’vsd 3.65%
• UK small businesses not changing plans in face of Brexit – survey
• Banks filling London staffing gaps before Brexit – Hays
• GB Sept RICS Housing Survey 6 vs 4, f’cast 4
• DE Oct TR IPSOS PCSI 58.02 vs 57.13
• GB Oct TR IPSOS PCSI 49.20 vs 47.78
• U.S. House to vote on $36.5 billion disaster relief package
• Trump expected to sign order side-stepping Obamacare rules

Looking Ahead – Economic Data (GMT)

• 12:30 US Initial Jobless Claims (w/e Oct 7) (mkt 251k, prev 260k)
• 12:30 US Continued Claims (w/e Sept 30) (mkt 1.935 mn, prev 1.938 mn)
• 12:30 US PPI Final Demand (Sept) (mkt +0.4% m/m, +2.5% y/y; prev +0.2% m/m, +2.4% y/y)
• 12:30 US Core PPI Final Demand (Sept) (mkt +0.1% m/m, +2.0% y/y; prev +0.1% m/m, +2.0% y/y)
• 12:30 CA New Housing Price Index (Aug) (mkt 0.3%, prev 0.4%)
• 15:00 US EIA Weekly Petroleum Status Report
• 18:00 US (tentative) Treasury Budget (Sept) (CBO $6 bn, prev Sep $33.445 bn)

Looking Ahead – Events, Other Releases (GMT)

• 12:00 FRB St. Louis’s Bullard speaks to Reuters editors
• 14:30 Fed Governor Brainard participates in panel on monetary policy; Washington, DC
• 14:30 Fed Governor Powell speaks on emerging markets; Washington, DC
• 14:30 ECB President Draghi speaks at the Peterson Institute event on monetary policy; Washington, DC
• 15:45 FedTrade operation 30-year Fannie Mae and Freddie Mac (max $2.2 bn)

Currency Summaries

EUR/USD

• EUR/USD 1.1880 high matching a 50% retrace 1.2092-1.1669 decline
• Daily Kinsen line also 1.1880. Pair eases to 1.1852 ahead NA open
• More strong EZ data ignored for now. Aug Industrial output 1.4% vs 0.5% f/c
• EUR 1.4bln expiries 1.1870-1.1905 adding to resistance of cloud top 1.1917
• EUR 2bln expiries may attract if a market long EUR decides to pare risk
• U.S. PPI today to give some insight for the major U.S. CPI release Friday

USD/JPY

• USD/JPY net selling flows this week might haunt bears
• Stops above 113.00 might become vulnerable
• Expect increased volatility on break sub 200-DMA @111.84 or above 113.44
• Narrow 112.21-53 range as long gamma market continues to take its tol
• Huge Expiries. Thu: 112.00 (1.8B), 112.40-60 (2.9B). Fri: 112.50-60 (2.0B)
• Japanese importers remains circa 112, Japanese exporters ahead of 113
• Sept dom corp goods prices +0.2% m/m, +3.0% y/y, as eyed, highest in 9 yrs
• Sept bank loans Y516.81 trln, +3.0% y/y, Aug +3.2%, July +3.3%.
• PM Abe’s LDP on track for solid majority, maybe 2/3 – Nikkei poll
• Global banks are after Japan’s cash – Nikkei

EUR/CHF

• EUR/CHF rises to a new trend high at 1.1557, tracking EUR/USD north
• 1.1534-1.1558 range in Europe and remains bid into NY
• Not much resistance until the 1.1588 Sept 25 German vote collapse day high
• Then post-1.20 SNB floor break high at 1.1623
• USD/CHF firmer, plays 0.9713 to 0.9750, supported above 0.9707 21-DMA
• A close above the 10-DMA at 0.9749 is required for run at 0.9770+
• U.S CPI data Friday is the next key event risk

GBP/USD

• Cable met fresh headwind pre-1.3268 in early Ldn trade after similar in Asia
• 1.3268 is 38.2% of 1.3659 (Sept 20 high) to 1.3027 (last Friday’s low)
• 1.3222 = cable low since 1.3262 early Ldn high. 1.3265 was Asia high
• Large 1.3200 option expiry for 10am ET NY cut, GBP 503mn strike
• Profit-taking on longs helped deflate EUR/GBP from 0.8988 to 0.8950
• 0.8950 = European am low. 0.8988 was Wednesday’s high

USD/CAD

• USD/CAD lift from 1.2434 (early Ldn 1wk low) aided by profit-taking on shorts
• 1.2484 (Tuesday’s low) is now a resistance level, with 1.2500 beyond
• Size of 1.2500 option strike for 10am ET NY cut is now USD 836mn

AUD/USD

• AUD/USD extended north to a 1wk high of 0.7836 in early European trade
• Ascent influenced by copper price rise to 1mth high of USD 6,850/tonne
• 0.7810 (Wednesday’s high) is now a support point

NZD/USD

• NZD/USD ticked up to fresh one-week high of 0.7124 during European am
• Some short NZD positions have been squeezed en route to that high
• 0.7052 = recent 19-week low. NZ govt decision expected by end of next week

FX OPTIONS

• 7 billion USD/JPY option expiries between 112-113 today NY cut
• USD/JPY 1 month vol new 6wk lows. JPY calls bid on election tail risk
• EUR/USD vols and EUR calls up with spot. Risk reversals 8 year highs
• GBP vol and put setbacks limited, highlight ongoing downside spot fears
• AUD/USD 1mth vol new setback lows. NZD vols premium, coalition awaited

COMMENT

UK CPI data rise could seal deal for BoE Nov hike

Sterling may get a boost if next week’s UK inflation figures show annualized CPI accelerated to 3.0% or higher in September, from a five-year high of 2.9% in August. A CPI number of 3.0% or more could cement the consensus expectation of a 25bps BoE interest rate hike next month (Nov 2). A hawkish shift in BoE expectations on the back of last month’s hawkish hold was the prime reason GBP was the best performing G10 currency in September. A new month then ushered in pain for late-to-the-party GBP bulls, before the pound recovered this week. The UK inflation data will be published on Tuesday (Oct 17), with the UK earnings report due a day later. More immediately, BoE chief economist Haldane is a slated panellist at a Rethinking Macro Policy Conference in Washington at 1745 GMT. Back in June, sterling rallied on the back of a hawkish steer from former dove Haldane.

CHART FOCUS

Dollar bulls should brace for more bouts of weakness

Dollar bulls should brace themselves for deeper falls as USD index seems to have established a significant peak at last week’s 94.267 high. Worryingly for bulls, the index has dropped this week to break the 200-WMA at 92.933. A close below the 200-DMA on Friday could prompt significant falls in coming weeks back towards the 2017 91.011 low posted in September. Recall last week there was a spectacular failure above 94.034 — 23.6% retrace of the 103.82 to 91.011 2017 fall — resulting in a lot of dollar bulls getting trapped. Fourteen-week momentum remains negative, as has been the case since March, highlighting the underlying offered structure of the index. If there is a failure to sustain this break below the 200-WMA into next week, then this will give bulls room to regroup.

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