FX Market Update 27-10

Market Briefs

• EUR/USD -0.14%, USD/JPY 0.01%, GBP/USD -0.49%, EUR/GBP 0.37%
• DXY 0.21%, DAX 0.73%, FTSE 0.21%, Brent -0.35%, Gold 0.12%
• U.S. economy likely slowed by hurricanes in third quarter
• ECB survey sees higher euro zone inflation in 2022
• DE Sept Import Prices MM 0.9% vs 0.0%, f’cast 0.4%
• DE Sept Import Prices YY 3.0% vs 2.1%, f’cast 2.6%
• Mattis talks diplomacy on N.Korea ahead of Trump’s Asia tour
• Spain set to impose direct rule in Catalonia as crisis spirals
• Japan consumer prices rise for 9th straight month; energy key driver
• Gold edges down as dollar gains vs euro on ECB policy
• Brent crude oil approaches $60 as markets tighten

Looking Ahead – Economic Data (GMT)

• 12:30 Real GDP (Q3 adv) (mkt +2.6% q/q AR, prev +3.1% q/q AR)
• 12:30 Real Final Sales (Q3 adv) (prev +2.9% q/q AR)
• 12:30 Real PCE (Q3 Adv) (prev +3.3% q/q AR)
• 12:30 Core PCE Price Index (Q3 adv) (mkt +1.2% q/q AR, prev +0.9% q/q AR)
• 14:00 U of Michigan Consumer Sentiment Index (final Oct) (mkt 100.8, prev 101.1)
• 14:00 U of Michigan Current Conditions Index (final Oct) (mkt 116.1, prev 116.4)
• 14:00 U of Michigan Expectations Index (final Oct) (mkt 91.2, prev 91.3)
• 17:00 Baker-Hughes Weekly Oil Rig Count (prev 736; -7 w/w, +293 y/y)

Looking Ahead – Events, Other Releases (GMT)

• 18:30 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.525 bn)

Currency Summaries

EUR/USD

• EUR/USD 1.1625-57 in Asia after 1.1815-1.1640 slide on ECB
• Europe trades a little lower 1.1616-44
• Close below 100-DMA 1.1679 & daily cloud base @ 1.1731 weigh
• Depth of, and need to adjust, heavy spec longs well reported
• 38.2% (min tech correction) April-Sep 1.0570-1.2092 (taper rally) is 1.1510
• Talk of sizeable option barriers 1.1600, 1.1550 & 1.1500

USD/JPY

• USD/JPY running into resistance ahead large options at 114.50
• Pair carved out high for Sept-Oct rally at 114.31 then 113.92
• Traders long USD should anticipate a slow grind through barriers
• Similar options eyed 115.00 and 115.50
• Stellar stock rallies and U.S. rate rise continue to support USD/JPY
• Today U.S. GDP at 12.30GMT. USD 1.3bn exp @ 114.00 USD 1bn 114.50

USD/CHF

• Cross licking its wounds following a bruising post-ECB Thurs session
• Chart watchers point to a key day reversal Thurs, higher hi, lower lo, cls below previous cls
• Drop from a new 1.1713 trend high to 1.1627 by the Thurs close
• Mild adjustment early Frid and a pause to reflect on ECB, SNB and Fed policy positions
• Spot markets reflect diverging rate outlook Europe vs U.S
• USD/CHF moves through parity: a high point since May 15 and bid holding into NY
• Techncals are overbought but pullbacks likely limited to 0.9950 upper 30DMA Bollinger

GBP/USD

• Cable slid thru 1.3100 to 1.3070 (17-day low) during the European am
• 1.3113 was Asia low. 1.3060/62 = Oct 9 low/100DMA. 1.3027 = Oct 6 low
• USD in ascendancy since ECB’s dovish taper Thursday
• Advance estimate of US annualized Q3 GDP 1230GMT, 2.5% f/c
• Fed chair choice expected within a week (Nov 2 latest)
• Short-covering helped lift EUR/GBP from 0.8862 to 0.89 during European am

USD/CAD

• USD/CAD scaled a fresh 15wk peak of 1.2888 during the European am
• 1.2858 (Thursday’s high) is now a support level
• Lots of CAD longs jettisoned since BoC’s dovish hold Wednesday
• IMM data circa 1930GMT will show positioning as of Tuesday
• M&A news: Canada’s Saputo buying Murray Goulburn for AUD 637mn

AUD/USD

• AUD/USD met European am headwind at 0.7650 after firming from 0.7625
• 0.7650 option expiry for NY cut, AUD 424mn strike. 0.7625 = Asia 15wk low
• Asia low plumbed after Aussie govt lost majority on ineligible Joyce verdict
• AUD also hurt by iron ore fall: Dalian closed down 5.6% Friday

NZD/USD

• 0.6850 = high water-mark for NZD/USD since 0.6818 tested in Asia
• 0.6818 was May 11 low. NZD/USD -7.4% since NZ election Sept 23
• Option barriers tipped at 0.6800: NZD/USD last at 0.6800 in June 2016

FX OPTION EXPIRIES

• EUR/USD: 1.1600 (518M), 1.1700-15 (612M), 1.1750-60 (878M), 583M)
• USD/CHF: 0.9890 (300M), 0.9940-60 (640M), 1.00 (449M)
• GBP/USD: 1.3000 (316M), 1.3150 (217M), 1.3190-1.3200 (317M)
• AUD/USD: 0.7650 (405M), 0.7725 (275M), 0.7800 (637M)
• USD/CAD: 1.2825 (320M) EUR/JPY: 135.00 (1BLN)
• USD/JPY: 113.00 (1.3BLN), 113.50 (625M), 114.00 (1.3BLN), 114.50 (1BLN)

COMMENT

USD/JPY moves now being dictated by option barriers

USD/JPY may see choppy one-yen ranges below successive topside option levels. USD/JPY is getting a lot of support from rising U.S. rates and stellar stock markets gains. JPY’s position as top funding currency is sure to see the unit underpeforming if stocks continue to head north. But, traders are fairly long USDs and USD/JPY is pushing against major technical resistances and so big option levels. The defence of option barriers adds to already strong technical resistance. But, if successful those defending barriers and selling dollars will buy dips to reload for a future defence, limiting dips. The size of these structures means defenders are probably selling well in advance. The popularity of 114.50 triggers due to major May/July highs 114.38/49, has probably led to smaller barriers 114.35-45. Major options are also expected at 115.00 (Feb high 114.95) and 115.50 (Mar high 115.51). These may lead to ratcheting effect higher as USD/JPY gradually works its way up. Chart 1)

CHART FOCUS

USD/ZAR acceleration hints at daily reversal

The speed and magnitude of USD/ZAR’s rally this week has brought over bought conditions to the market. Monday low of 13.6525 swiftly turned into Thursday highs of 14.30. Looking stretched into the Friday open but an acceleration to 14.3575 seen. Often see a sharp pickup in price just before a reversal so now wary of a deep pullback. Price is also clear above the 30-day upper Bollinger line, another indication of a market over reaching. On the reversal would look for a return to the 30DMA Bollinger, currently 14.0880. A break back inside the envelope to signal further bearish potential. It will take a drop under the previous 13.8650 peak from October 9 to severely damage the up-trend and signal a full blown reversal of the 13.2525 October 13 to 14.3575 Oct 26 bull run.

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