FX Market Update 2-11

Market Briefs

• EUR/USD 0.27%, USD/JPY -0.07%, GBP/USD -0.14%, EUR/GBP 0.4%
• DXY -0.19%, DAX -0.16%, FTSE 0.29%, Brent -0.41%, Gold 0.18%
• Bank of England set to raise rates for first time since 2007
• DE Oct Markit/BME Mfg PMI 60.6 vs 60.5, f’cast 60.5
• Trump tax drive nears major milestone as U.S. House readies bill
• Oct was strongest month for euro zone factories in almost 7 years –PMI
• GB Oct Markit/CIPS Cons PMI 50.8 vs 48.1, f’cast 48.1
• DE Oct Unemployment Chg SA -11k vs -23k, f’cast -10k, r’vsd -22k
• DE Oct Unemployment Rate SA 5.6% vs 5.6%, f’cast 5.6%
• EZ Oct Markit Mfg Final PMI 58.5 vs 58.6, f’cast 58.6
• Bitcoin skyrockets above $7,000 for first time ever
• Catalan secessionist leaders to appear in court, without Puigdemont
• Gold hits 1-wk high; Fed chair pick in focus

Looking Ahead – Economic Data (GMT)

• 11:30 Challenger Layoffs (Oct) (prev 32,346)
• 12:30 Initial Jobless Claims (w/e Oct 28) (mkt 235k, prev 233k)
• 12:30 Continued Claims (w/e Oct 21) (mkt 1.897 mn, prev 1.893 mn)
• 12:30 Productivity (mkt +2.4% q/q AR, prev +1.5% q/q AR)
• 12:30 Unit Labor Costs (Q3) (mkt +0.5% q/q AR, prev +0.2% q/q AR)
• 13:45 ISM-New York Report on Business (Oct) (prev 49.7)

Looking Ahead – Events, Other Releases (GMT)

• 12:00 BoE Bank Rate
• 15:45 FedTrade Operation 15-year Fannie Mae / Freddie Mac (max $490 mn)
• 16:20 FRB’s Dudley delivers remarks at Alternate Reference Rates Committee Roundtable event; NY
• 22:15 FRB’s Bostic speaks on “The Vital Role of Government Statistics”; Chicago, IL
• n/a President Trump to announce Fed Chair nominee

Currency Summaries

EUR/USD

• EUR/USD static ahead today’s BOE and expected big news out of U.S.
• News on Fed Gov expected around 19GMT, news on tax deal hoped for
• German PMI 60.6 in Oct from 60.5. EZ PMI 58.5 in Oct for 58.6
• Italian and Spanish PMI impressed, France the weak link
• EUR 6billion vanilla options expiries layered 1.1580-1.1700 today
• Another tight range dictated by expires highly likely

USD/JPY

• USD/JPY steady above 114.00 looks bullish but shy key 114.50 barriers
• Defenders had ample opportunity to reload over the last week (112.96 low)
• Some barriers RE tipped expiring tomorrow so a stiff defence is likely
• Japanese investors dumped Ytln foreign bonds Oct 22-28
• Unwind of assets likely added to USD/JPY resistance, seems Japan inc 110-115
• Today USD 1.2bln 114.00 vanilla expiries to anchor. 21-DMA 113.06 key below

USD/CHF

• EUR/CHF stalling at 1.1664 recovery highs from Wed and today
• Still a threat of a bullish resumption but technicals need consolidation/adj
• USD/CHF also backing away from Wed highs and again techs were looking o/b
• Resistance at 1.0039, Oct 27 high and support 0.9939 low from Oct 30 low
• USD/CHF needs a weekly close above parity to extend Oct rise
• Latest Swiss retail sales data showed a 0.4% y/y fall in Sept [nZ8N1LU02I]
• Seasonally adjusted data showed a 0.8% rise over August
• Fed chair nomination expected around 1900GMT, news on tax deal hoped for too

GBP/USD

• Cable fell to 1.3234 ahead of UK construction PMI beat at 0930GMT
• 50.8 vs 48.1 f/c, but expectations index slumped to near five-year low
• BoE rate hike expected 1200GMT, accompanying message key for GBP
• “Hawkish hike” could propel cable to 1.34/1.35, “dovish hike” to weigh
• EUR/GBP up to threaten 0.88 as clock ticks towards BoE MPA
• Carney press briefing starts 1230GMT (usually lasts an hour)

USD/CAD

• USD/CAD firmed to 1.2851 from an early Europe low of 1.2824
• 1.2876 was Asia high. Key resistance beyond at 1.2900-16
• Fed chair announcement expected circa 3pm ET: Powell hot favourite

AUD/USD

• AUD/USD gravitated to 0.7700 after revisiting 0.7726 in early European trade
• Large 0.7700 option expiry for 10am ET NY cut, AUD 1bln strike
• 0.7726 was Asia high after AUD boosted by upbeat Australian data

NZD/USD

• 0.6905 = low water-mark for NZD/USD since 9-day high of 0.6944 in Asia
• Offers expected near 0.70 (former support point) if kiwi extends north
• 0.7005 was last week’s high (Oct 24). 0.6818 = subsequent low
• Huge AUD/NZD 1.11 & 1.13 expiries Friday, AUD 1.49bln & 2.3bln strikes

FX OPTIONS

• Focus on UK MPC at 12GMT, GBP break-evens are high
• O/n Cable vol at 19.0 is 105 pips and EUR/GBP at 18.5 is 68 pips
• 1 week vols hold firm too – Cable 9.5/140 pips and EUR/GBP 9.0/87 pips
• EUR/USD 5bln expiries between 1.1580-1.1650, 2bln from 1.1670-1.1700
• USD/JPY 3.5bln expiries 114.00 thurs/Fri help contain
• G10 vols on a very low base across the board, many at cycle lows or l/term lows

COMMENT

BoE – 7-2 expected, equal risks of 8-1 and 6-3

We are expecting the BoE vote to be 7-2 in favour of a hike at the MPC meeting tomorrow with Ramsden and Cunliffe to dissent. How big the majority that votes for a rate hike is important especially as not all members are on the same page, even if they agree that there is a need to adjust policy by taking back the easing that was delivered since the EU referendum. While we see Cunliffe as voting against a rate hike this is far from certain, as is the case for Silvana Tenreyro, who in her TSC appearance last month was sitting on the fence with regards to the next move. We see the risk of an 8-1 vote as equally likely as 6-3 as we have not had all MPC members reveal their preferences. Current market expectations have a 2nd hike priced in by the August 2018 BoE meeting. An 8-1 vote would see the market more willing to entertain the prospect of an earlier rate hike (May instead of August) while 6-3 would muddy expectations on the timing of the next hike (November instead of August). The curve, however, remains flat with the spread between 2y1y GBP OIS and 1y1y GBP OIS spread still loitering around 15bps. We have suggested a 2wk 1.30 GBP put/USD call as well as receiving 1y1y GBP OIS as attractive from a risk/reward perspective given the prospect of a dovish hike.

CHART FOCUS

Growing scope for EUR/GBP correction

EUR/GBP technicals suggest a short term base could be in place and rebounds will offer up better selling opportunities. Looking ahead, the 61.8% Fibo of the April to September 0.8315 to 0.9307 advance at 0.8694 is among downside objectives for short plays. Price action formed a Doji on the daily candles Wednesday signaling indecision. Confirmation with a higher high and close Thursday will confirm the reversal pattern. The signal, combined with the rebound from the lower 30-DMA Bollinger, today at 0.8736, suggests corrective action is due. Historically, the cross does not stray far or for long outside of Bollinger bands and a correction could rally as far back to the 30-DMA at 0.8874 looks possible on the charts. A lower low and close Thursday negates this view and sees a continuation of the downtrend. A break and close under the aforementioned 61.8% Fibo at 0.8694 then risks a deeper retreat to the lower 0.8300s

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