FX Market Update 19-10

Market Briefs
• EUR/USD 0.33%, USD/JPY -0.32%, GBP/USD -0.32%, EUR/GBP 0.69%
• DXY -0.14%, DAX -0.63%, FTSE -0.35%, Brent 0.43%, Gold -1.12%
• GB Retail Sales YY 1.2% vs 2.4%, 2.1% f’cast
• German economy seen growing 2.2% in 2018 – DIHK Chambers of Commerce
• China c.bank warns against “Minsky Moment” due to excessive optimism
• Spain threatens Catalonia with direct rule from Madrid
• Oil slips but holds most recent gains on expected OPEC cuts
• Gold hits over 1-week low as dollar holds firm

Looking Ahead – Economic Data (GMT) 
• 12:30 Initial Jobless Claims (w/e Oct 14) (mkt 240k, prev 243k)
• 12:30 Continued Claims (w/e Oct 7) (mkt 1.900 mn, prev 1.889 mn)
• 12:30 Philadelphia Fed Manufacturing Index (Oct) (mkt 22.0, prev 23.8)
• 14:00 Leading Economic Indicators Index (Sept) (mkt +0.1% m/m, prev +0.4% m/m)

Looking Ahead – Events, Other Releases (GMT) 

• 13:30 FRB Kansas City’s George (non-voter, hawk) speaks on the U.S. economy; Altus
• 13:45 Fed Trade operation 30-year Fannie Mae / Freddie Mac (max $985 mn)
• 14:30 Fed conducts 7-day floating rate deposit operation (IOER +0.01%)

Currency Summaries
EUR/USD 

• EUR/USD well supported despite interest rate moves & political uncertainty
• EUR/USD moving higher even though yield spreads have been favouring USD
• Today pair resilient to escalating tensions between Catalonia & Spain
• Catalan’s elusive about independence, Spain to suspend autonomy Saturday
• EUR/USD up early to 1.1822 dips to 1.1768 then back to 1.1817
• Expectations of ECB taper appear to be main factor supporting euro

USD/JPY 

• London has had a selling frenzy, pushing USD/JPY down to 112.46
• Conversely Asia were neutral, after their shorts were heavily squeezed Wed
• Risk remains on the downside for a retest of 112.00, spot eyes expiries
• Large strikes set to expire @112.50 (850M) & 112.00 (1.4B) on Fri
• Also negative USD/JPY as daily cloud twist in mid 110s looms
• Japanese exporters have kept a lid on USD/JPY, 113.14 was the high
• BoJ DepGov Nakaso – Will adjust yield curve as need to achieve 2% CPI
• Sept trade surplus Y670.2 bln, Y559.8 bln eyed, exp +14.1% y/y, imp +12.0%
• Exports to US +11.1%, China +29.3%, Asia +18.7%, crude imp vol -5.3%
• MoF flow data wk-ended Oct 14 – Japanese buy net Y153.7 bln foreign stocks
• Y269.7 bln for-bonds bought too, foreign investors buy Y840.7 bln JPN stks

EUR/CHF
• USD/CHF failed to close abv 200DMA Wed and early Thurs sees sharp retreat
• From Wed 0.9838 high to 0.9774 and back roughly where it started the Wed session
• A sea of red on the equity screens and safety flows head back to the CHF
• Market jitters over Spain and disappointing Q3 results hurting European bourses
• European stocks stage biggest fall in almost two-months: DAX off 0.7% at one point
• This despite 13th straight bull close for Nikkei and 23k+ close for the Dow
• EUR/CHF lower but lags USD/CHF in retrace of Wed rally: 1.1525-1.1585 and 1.1550 into NY

GBP/USD 

• Cable fell another half-cent to threaten 1.3122 on big UK retail sales miss
• UK retail sales -0.8% in Sept vs -0.1% f/c. 1.3122 was Oct 12 low
• Cable also fell half-a-cent ahead of the 0830GMT UK data release
• 1.3213 was early Ldn high. 1.3228 was Asia high (1.3218 = Weds high)
• EUR/GBP rose 37 pips to 0.8977 on the big UK retail sales miss
• 0.8977 = new 1wk high. May to put her Brexit case to EU over dinner Thurs

USD/CAD 
• Mooted option-related selling helped curtail USD/CAD rise from 1.2452
• Large 1.2500 option expiry for 10am ET NY cut, USD 890mn strike
• 1.2487 = European am intra-day high. 1.2452 was European am low
• 1.2453 was Asia low (1.2450 was Oct 13 low)

AUD/USD
• Mooted offers near 0.79 may keep lid on AUDUSD if it vaults 0.7875
• Option-related supply seen in mix: 0.79 option expiries Thursday & Friday
• AUD 715mn = cumulative size of strikes. 0.7898 was last week’s high
• 0.7875 was early Europe high as continent digested Aussie jobs data beat

NZD/USD
• NZ First’s choice to go into govt with Labour-Green bloc has hit NZD hard
• NZD/USD down to 0.7027 (20wk low) during European am
• AUD/NZD up to 1.1185 (18mth high). 1.0957 was Asia low
• National Party had been in power since 2008

FX OPTIONS
• GBP vol losses limited by weak retail sales. GBP put bias steady
• EUR/USD resilient despite latest Catalan woes, Vol slide stalls
• 1 week gets ECB, 1 week EUR/USD adds 3.5 vols to 9.25/120 pips
• USD/JPY vols off lows as spot probs 113, JPY call bias weakens further
• NZD vol setbacks limited as Labour coalition hurts NZD

COMMENT
Sterling fireworks to front-run Bonfire Night
Sterling looks set for some fireworks before Bonfire Night Nov 5, three days after the BoE decides on interest rates. Doves opposed to a 25bp hike on Nov 2 got a boost from Thursday’s much steeper than expected 0.8% decline in UK retail sales in September. The weak data came 48 hours after doves were enthused by new BoE deputy governor Ramsden’s disclosure that he is not ready to vote for a rate hike .The probability of a quarter-point BoE rate hike on Nov 2 is currently 70%, according to the BOEWATCH measure on TR Eikon, versus 80% before Ramsden spoke Tuesday. The dovish shift in expectations should tee up a larger move for GBP either way on Nov 2 than if the hawks still held absolute sway. The current consensus expectation is for a 7-2 or 6-3 MPC vote to hike by 25bp. Next week’s key UK event risk is the preliminary ONS estimate of Q3 GDP (Oct 25).

CHART FOCUS
EUR/GBP poised for new bull cycle to 0.9100 & beyond

EUR/GBP looks set to break above the recent 0.9033 peak en route to 0.9093 — 61.8% retrace of the 0.9307 to 0.8747 (August to September) fall. This will pave the way to the 0.9100 psychological level and then 0.9175 — 76.4% of the same 0.9307 to 0.8747 drop. EUR/GBP has been hovering below the daily thinning cloud currently spanning 0.9026-0.9067. The cloud will shrink to 0.9017-0.9026 on Friday, which may be the opportunity bulls have been waiting for as it provides a clear opening to the upside. Recall bulls were frustrated by the false break above 0.9027 last week — 50% retrace of the 0.9307 to 0.8747 (August to September) fall — but they have since regrouped. Only a break and daily close back below the 0.8895 kijun line will weaken the bullish resolve and shift the overall bias back to the downside

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