FX Market Update 26-10

Market Briefs

• EUR/USD -0.02%, USD/JPY -0.1%, GBP/USD -0.26%, EUR/GBP 0.24%
• DXY -0.02%, DAX 0.36%, FTSE 0.37%, Brent -0.14%, Gold 0.11%
• ECB to curb bond-buying in first step towards end of easy money
• U.S. House to vote on budget plan amid Republican fight on taxes
• UK parliament expected to vote on Brexit deal by late 2018 or early 2019 -Davis
• DE Nov GfK Consumer Sentiment 10.7 vs 10.8, f’cast 10.8
• EZ Nov Money-M3 Annual Grwth 5.1% vs 5.0%, f’cast 5.0
• EZ Sept Loans to Households 2.7% vs 2.7%, f’cast 2.8%
• EZ Sept Loans to Non-Fin 2.5% vs 2.5%, f’cast 2.5%
• GB Oct CBI Distributive Trades -36 vs 42, f’cast 15
• China says will not set target to double GDP from 2021, in change from the past
• Global investors race for rare China sovereign bond, orders top $20 bln

Looking Ahead – Economic Data (GMT)

• 12:30 Initial Jobless Claims (w/e Oct 21) (mkt 235k, prev 222k)
• 12:30 Continued Claims (w/e Oct 14) (mkt 1.890 mn, prev 1.888 mn)
• 12:30 Revised Building Permits (Sept) (initial 1.215 mn SAAR)
• 12:30 Advance Goods Trade Balance (Sept) (prev adv $62.9 bn)
• 12:30 Advance Wholesale Inventories (Sept) (prev adv +1.0% m/m)
• 12:30 Advance Retail Inventories (Sept) (prev adv +0.7% m/m)
• 14:00 Pending Home Sales Index (Sept) (mkt 106.5, +0.2% m/m; prev 106.3, -2.6% m/m)
• 15:00 Kansas City Fed Manufacturing Index (Oct) (prev 17)

Looking Ahead – Events, Other Releases (GMT)

• 12:30 ECB President Mario Draghi holds a press conference following the interest rate decision meeting
• 14:30 FRB Kashkari gives welcome remarks before inclusive growth conference; Minneapolis, MN
• 15:45 FedTrade operation 30-year Ginnie Mae (max $1.085 bn)

Currency Summaries

EUR/USD

• EUR/USD 55-DMA @ 1.1842 defines nearest resistance, high 1.1837
• Daily cloud 1.1731-1.1906 influencing ranges, closing break to change that
• Below 1.1670 would confirm a head & shoulders break target 1.1250
• Oct range 1.1880-1.1669. O/n ATM straddle (gauge days range) just 86 pips
• EUR 4bn vanilla expires between 1.1700-1.1950 today
• Euro zone M3 moves further above ECB’s ref rate to 5.1%

USD/JPY

• USD/JPY and U.S. rates off yesterday’s highs 114.24 & 2.475%
• USD/JPY back down to 113.48 the 113.34-78 in Asia today
• Japan Post plans to buy hedged foreign bonds
• Prudent approach bonds but eyes riskier equity assets/alternate inv
• 200-HMA @ 113.10 an important pivot below (traders widely long USD)
• Major options @ 114.50 key above. Potentially 114.25 barriers too

EUR/CHF

• Cross holding just below Wed’s new-post SNB floor removal high
• Talk of offers attached to the 1.1705: 1.1701 the Thurs high so far
• Ahead of potential ECB taper and with negative SNB rates cross supported
• Prior 1.20 SNB floor is the medium-term ceiling/target
• USD/CHF showing signs of fatigue after putting in a 0.9940 Wed top
• Easier bias but pullback limited to 0.9878 so far
• House Budget/tax plan, ECB taper & Fed picks are main event risks

GBP/USD

• Cable fell by almost a cent to a low of 1.3179 during the European am
• In absence of any fundamental news, GBP sell order suspected catalyst
• Cable scaled 9-day peak of 1.3278 in Asia (1.3271 = Wednesday high)
• EUR/GBP rose to 0.8957 during European am: 0.8880 was Wednesday low
• More EUR/GBP volatility expected courtesy of ECB/Draghi event risk
• 0.8972 (Wednesday high pre-UK Q3 GDP beat) & 0.9000/20 resistance

USD/CAD

• USD/CAD met headwind at 1.2810 (Asia high) after firming from 1.2784
• 1.2784 = early Europe low. 1.2816 was Wednesday’s high on dovish BoC
• 1.2816 = highest level for USD/CAD since July 12

AUD/USD

• AUD/USD extended south to 0.7678 after dovish Debelle steer at 0750GMT
• Debelle said Aussie labour market has ‘sizeable degree’ of spare capacity
• 0.7678 = 15-week low. 0.7696 was early Europe low (pre-Debelle)
• Dovish Debelle is fresh blow for hawks advocating RBA hike anytime soon

NZD/USD

• NZD/USD eased to 0.6868 from an early Europe intra-day high of 0.6904
• 0.6861 was Wednesday’s five-month low. 0.6818 was May’s low
• Option barriers tipped at 0.6800 (NZD/USD last at 0.6800 in June 2016)

FX OPTIONS

• ECB risk sees O/n EUR/USD vol break even 86 pips, EUR/GBP 60 pips
• 1-week expiry vols get FOMC but minimal event risk for the November meeting
• MPC risk premium sees 1-week GBP/USD vol up 2.0 to 9.25 or 135 pips
• USD/JPY stymied by 8bln 113-114 expiries today/Friday and topside barriers 114.25-50
• AUD/USD vols not concerned with AUD weakness as wider July/Sept range holds

COMMENT

Parsing ECB QE taper plans for rate hike clues

The ECB is expected to announce lower for longer QE at today’s meeting but beyond the size of the monthly asset purchases, the length of the extension will be key for markets to determine when a rake hike might happen. Continuing the QE programme for a further 9-12 months implies a rate hike will happen later than initially thought. The importance of sequencing can be seen by the strong correlation between 1y1y EONIA and the 10-year Bund yield over the last few months. Market consensus is for a tapering to EUR30 billion purchases over 9 months, but we expect it to taper to EUR 20 billion over 12-months. Given sequencing, this would mean the first hike will not happen until well into 2019. ECB’s Draghi said earlier this month forward guidance on rates was “very, very important”. As long as the ECB does not tinker with sequencing it should be able to smoothly announce the bulk of its QE plans today without a big impact on EUR/USD or Bunds.

CHART FOCUS

Cloud progress proving tough for GBP/USD

Cable bulls are finding it tough going after a clear break inside the daily cloud on Wednesday when the pair threatened a run at the cloud top. Cloud resistance looks intact at the moment due to a lack of bullish confirmation so far Thursday. Cloud top is at 1.3310 and is joined by the 30-DMA. Though it may pay not to give up on Wednesday’s bullish key day just yet, a close below the 1.3217 cloud base would damage the signal. A buy on dips strategy is favoured while above 1.3110 with the 50% Fibo off the Sept 20 1.3659 high and 1.3027 Oct 6 low at 1.3343 a target. The last significant high, from Oct 13, is just ahead at 1.3337. Weeklies continue to pan out sideways and look to put a brake on gains for now. A close above the weekly cloud at 1.3257 would improve the chances of a bull play.

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