FX Market Update 16-10

Market Briefs

• EUR/USD -0.25%, USD/JPY -0.02%, GBP/USD 0.06%, EUR/GBP -0.28%
• DXY 0.14%, DAX 0.19%, FTSE 0.11%, Brent 1.4%, Gold 0.02%
• DE Sept Wholesale Price Index YY 3.4% vs 3.2%
• EZ Aug Eurostat Trade NSA, Eur 16.1B vs 23.2B
• May heads for Brussels after Brexit talks deadlock
• Madrid moves towards direct rule over Catalonia as deadline passes
• Canadian small business lending rises in August -PayNet
• White House pitches corporate tax cut as win for workers
• BoJ Gov Kuroda – No excesses in markets, will continue easy policy
• IMF Brekk – Sales tax hike obvious choice for Japan debt woes
• JP MoF off’ls – G20 didn’t discuss trade, FX, Japan not fx manipulator
• China cbank chief surprises with gravity-defying 7 pct H2 growth forecast

Looking Ahead – Economic Data (GMT)

• 12:30 New York Fed Empire State Manufacturing Index (Oct) (mkt 20.7, prev 24.4)
• 18:00 ECB’s Lautenschlager speaks in Washinton DC

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.52 bn)
• 01:00 FRB Kashkari participates in moderated Q&A session (with audience Q&A); Minneapolis, MN

Currency Summaries

EUR/USD

• EUR/USD in tight but lower 1.1780-1.1809 range in Europe
• Spain give Catalonia Thursday deadline to drop independence
• Merkel’s Saxony loss & Austrian far right rise weigh EUR
• Fed hawks continue to show their talons while Draghi coos
• EUR/USD down despite lower U.S. rates after softer than f/c CPI
• Buyers rather than stops emerge on first dip below 200-HMA @ 1.1784

USD/JPY

• USD/JPY has seen a 111.65-112.08 range so far Mon
• Offered USD/JPY held up by decent sized bids tipped circa 111.50
• Intra-day technical support comes in @111.60 pivot point
• On the upside there are said to be offers capping 112.10+
• Daily close below 200-DMA @111.79 will weaken the structure further
• Ramped up speculative USD/JPY longs look vulnerable
• Net USD/JPY sales on machine so far Monday contributing to an offered market

EUR/CHF

• EUR/CHF continues to slip from Thurs peak in line with a lower EUR/USD
• Probing the 21-DMA at 1.1491. 1.1518-1.1490 range Europe. 1.1525 Asia high
• Swiss domestic sight deposits fall to 471.303bln in w/e Oct 13
• Speculation remains of official bid circa 1.14. Brief spike to 1.1389 Oct 2
• USD/CHF sideways after Friday dip to 0.9705. 0.9768-0.9747 European range
• Remains supported ahead of the rising 21-DMA at 0.9720

GBP/USD

• EUR/GBP tripped stops below 0.8877 en route to 0.8857 European am low
• 0.8857 = 12-day low. 0.8877 was Friday’s low & Oct 5 low. 0.8850 = Oct 4 low
• GBP/USD traded a 41 pip range during the European am, 1.3271-1.3312
• 1.3249-1.3337 = Friday’s range. May in Brussels with Juncker/Barnier Monday
• UK Sept CPI due Tuesday, 3.0% f/c. Carney letter if CPI at/above 3.1%
• Carney to address TSC Tuesday after Ramsden/Tenreyro appointment meets

USD/CAD

• USD/CAD has risen from a European am low of 1.2471 to threaten 1.2500
• Above-figure resistance 1.2520 (Friday’s high). 1.2450 was Friday’s low
• BoC business outlook survey due at 1430GMT, may impact CAD
• On Saturday, Poloz said Canada growth to slow down in H2

AUD/USD

• AUD/USD respected its 0.7868-0.7893 Asia range thru the European am
• Higher commodity prices are a source of support for AUD
• Copper up to three-year high north of USD 7,000 tonne Monday
• Dalian iron ore closed up 3.8% Monday

NZD/USD

• NZD/USD met fresh headwind pre-0.72 during the European am
• 0.7191 = European am high. 0.7197 was Friday’s high
• NZ Q3 inflation data due 2145GMT, f/c +1.8% vs +1.7% previously
• Formation of new NZ government expected this week

FX OPTIONS

• EUR/GBP 1.7bln 0.8885-0.8900 expiries today, 1.5bln 0.8940-60 Wed’s
• GBP/USD O/n vol break even 71 pips over Tues inflation data, vols/puts bid
• EUR/USD vols heavy as ranges hold. EUR calls stay firm on risk reversals
• USD/JPY 1 week gets election, atm vol 7.5 to 9.0, risk reversal 0.9 to 1.9 JPY call
• USD/JPY inability to break away from 112 impacts realised and implied vols
• NZD 8 day downside strikes favored, Coalition result expected end of week

COMMENT

Profit-taking to weigh on EUR/USD ahead of Oct ECB

Position adjustment may weigh on EUR/USD ahead of the Oct 26 ECB meeting where there’s little certainty about its QE taper plans. German, Austrian and Spanish politics have conspired against those betting on a higher euro. So too has commentary from central bankers with most Fed speakers still talking rates up a lot more than markets are pricing, while ECB Governor Draghi has maintained his dovish bias. The deal breaker is EUR/USD’s reaction to last Friday’s U.S. data. Where the broader dollar softened on the back of the small downside miss for U.S inflation data, EUR/USD also eased–most likely due to speculative positions. Traders added to an already huge bet on a higher euro in the past two weeks but ran into tough resistance at the daily Ichimoku cloud top, now 1.1917, and so booked some profits. With little certainty over what the ECB may say next week, more profit-taking may lead to a test of the daily cloud base at 1.1703.

CHART FOCUS

USD/JPY risks slide towards 110

USD/JPY bears are grappling with the 200-DMA, which is currently at 111.79, a daily close below which will them give them momentum towards significant downside levels under the 30-DMA now at 111.47. The scope would grow for losses to the 110.00 psychological level once the 110.38/111.10 Fibonacci levels give way — 50%/38.2% retrace of the 107.32 to 113.44 (September to October) rise. USD/JPY managed to register a daily close below 112.00 on Friday — 23.6% retrace of the same 107.32 to 113.44 rise — a confirmation that the downside risk is growing. Fourteen-day momentum is at risk of a negative reading for the first time since Sept 11, which would reinforce the new found negative sentiment. If there are a series of failures to register a daily close below the 200-DMA, then this will give USD/JPY bulls a chance to regroup and minimise the downside risk.

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