FX Market Update 14-11

Market Briefs

• EUR/USD 0.49%, USD/JPY 0.02%, GBP/USD -0.12%, EUR/GBP 0.58%
• DXY -0.24%, DAX -0.06%, FTSE 0.17%, Brent -0.28%, Gold -0.34%
• Fed chief says policy guidance beneficial but must be conditional
• ECB’s Draghi says “forward guidance” on policy a success
• EZ Q3 GDP Flash Estimate QQ 0.6% vs 0.6%, f’cast 0.6%
• EZ Q3 GDP Flash Estimate YY 2.5% vs 2.5%, f’cast 2.5%
• EZ Sept Industrial Production YY 3.3% vs 3.8%, f’cast 3.2%, r’vsd 3.9%
• DE Q3 GDP Flash QQ SA 0.8% vs 0.6%, f’cast 0.6%
• DE Q3 GDP Flash YY NSA 2.3% vs 0.8%, f’cast 2.3%, r’vsd 1%
• DE Oct CPI final YY 1.6% vs 1.6%, f’cast 1.6%
• DE Oct HICP final YY 1.5% vs 1.5%, f’cast 1.5%
• DE Nov ZEW Economic Sentiment 18.7 vs 17.6, f’cast 20
• DE Nov ZEW Current Conditions 88.8 vs 87, f’cast 88
• GB Oct CPI YY 3% vs 3%, f’cast 3.1%
• GB Oct RPI YY 4% vs 3.9%, f’cast 4.1%
• GB Oct PPI Core Output YY NSA 2.1% vs 2.5%, f’cast 2.2%

Looking Ahead – Economic Data (GMT)

• 13:30 PPI (mkt +0.1% m/m, +2.4% y/y; prev +0.4% m/m, +2.6% y/y)
• 13:30 PPI Core (mkt +0.2% m/m, +2.3% y/y; prev +0.4% m/m, +2.2% y/y)
• 13:55 Redbook Same Store Sales Index (prev +2.6% y/y)

Looking Ahead – Events, Other Releases (GMT)

• 15:30 ECB’s Coeure speaks at ICMA meeting – Belgium
• 16:45 FedTrade Operation 30-year Ginnie Mae (max $1.280 bn)
• 18:05 FRB’s Bostic speaks on economy and monetary policy; Montgomery, AL

Currency Summaries

EUR/USD

• EUR/USD opens 1.1674 and trades 1.1665-1.1725 range in Europe
• Push higher influenced by strengthening EZ area growth
• German Q3 GDP started the ball rolling, 0.8% qq in Q3 vs 0.6% f/c
• Italian GDP also impressed but overall EZ measure only matched 2.5% yy f/c
• German ZEW data then slightly undershot a bullish 20.0 f/c at 18.7
• 10-yr German bond yield opens strongly hit 0.43% but eased back to 0.40%

USD/JPY

• USD/JPY has risen from 113.52 to hit 113.91, but plenty of supply above
• 113.91 — 50% retrace of the 114.73 to 113.09 fall — weighs
• Expect decent amount of offers at 114.00 psychological level
• Further resistance should weigh heavily at last Thu’s 114.07 high
• 114.10 is 61.8% of the same 114.73 to 113.09 fall
• USD2bln 114.00-25 expires may help cap any further gains Tues

EUR/CHF

• EUR/CHF continues its run higher in line with EUR/USD which is up 0.5%
• Cross plays 1.1632 to 1.1661 in Europe. 1.1622 was the low in Asia
• Remains well supported by the 30-DMA line, rising to 1.1576 Tuesday
• Techs target the upper Bollinger at 1.1696 and the Oct 26 1.1713 peak
• Weekly Tenkan support is at 1.1551 – close below there would dent uptrend
• USD/CHF 0.9960 to 0.9940 in Europe. Within Monday’s 0.9937-87 range
• Weekly cloud twist by 0.9925 helping pull prices lower
• Swiss producer/import prices up 0.5% m/m, 1.2% y/y in Oct

GBP/USD

• Cable fell nearly half-a-cent to 1.3075 on UK Oct inflation data miss
• CPI +3.0% y/y vs 3.1% f/c. EUR/GBP rose to 19-day high of 0.8954
• 0.8933 was early Europe cross high after German GDP data beat
• Germany’s economy grew 0.8% in Q3, double the level of UK growth
• 1.3063 (Monday’s 1wk low) & 1.3040 (Nov 3 low) are cable support levels
• BoE dove Cunliffe speaks 1730GMT. Cunliffe voted against Nov 2 hike

USD/CAD

• USD/CAD scaled a six-day peak of 1.2755 during the European am
• 1.2728 = subsequent low water-mark. 1.2741 was Monday’s high
• Near quarter-yard 1.2730 option expiry Wednesday
• Next round of NAFTA talks due to get underway next week (Nov 15)

AUD/USD

• AUD met headwind at 0.7639 after rising from 0.7613 during European am
• 0.7639 was Asia high. 0.7609 was four-month low in Asia
• AUD/NZD up to 1.1138 (11-day high) as AUD outperforms NZD
• Huge 1.1100 option expiry Thursday, AUD 2.33bln strike

NZD/USD

• NZD/USD extended south to 13-day low of 0.6844 during the European am
• 0.6904 was early Wellington high. Bids expected near 0.6818
• 0.6818 marks the 2017, first plumbed in May & revisited late Oct
• AUD/NZD within strike of huge 1.11 option expiry for Thursday’s NY cut

FX OPTIONS

• Gains for 1-month vols as expiry captures FED, ECB, BOE MPC
• EUR/USD 1mth +1.0, USD/JPY 1mth+0.5, AUD/USD 1mth +0.75
• GBP related vols already paid up Monday amid Brexit and political woes
• EUR/USD gains help to lift vol curve further away from 3-year lows
• USD/JPY downside risk still apparent via JPY call risk reversal demand

COMMENT

Stars may be aligning for EUR/GBP parity

Latest evidence of widening divergence in the euro zone and UK growth and outlooks may spur EUR/GBP to rise to 1.00 in coming months. Data published Tuesdayshowed Germany’s economy grew by a higher than expected 0.8% in Q3–double the level of UK Q3 growth. The strength of the German economy suggests the euro should be stronger. EUR/GBP could also gain if the EU summit on December 14-15 concludes there has not been enough progress on Brexit negotiations to proceed to trade talks. Any such conclusion would only increase the political heat on British PM May–who is facing a UK parliamentary test over her government’s Brexit plans starting Tuesday. Sterling could also soften if UK annualized November CPI inflation eases after unexpectedly holding steady in October. November’s UK inflation data is due Dec 12, two days before the next BoE monetary policy announcement. EUR/GBP has never traded at 1.00 since the euro was launched in 1999, but got within two pence of parity after a 15 pence surge in December 2008. Chart 1)

End of year run not favouring the SEK

EUR/SEK is looking overbought but remains supported by fundamentals so looking to top pick is a dangerous game. The pair hit a new 2017 high today after weaker than expected Swedish October inflation data strengthened the view that prices are likely to ease next year with a first Riksbank hike in October/November 2018. A marked deterioration in the inflation trend could, however, see the hike date moved into 2019, further weighing on the SEK. October CPIF at 1.8% annualised matched the Riksbank call but was down from September’s 2.3% return. The krona has fallen to 9.8765 versus the EUR, last at this level early December 2016. Those looking to exploit the overbought condition on the daily chart should not be too greedy. Expect fresh bidding to emerge at the previous top at 9.8100 from Nov 3. Weeklies are also stretched and again 9.8100 is likely pullback level.

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