FX Market Update 16-11

Market Briefs

• EUR/USD -0.23%, USD/JPY 0.27%, GBP/USD 0.21%, EUR/GBP -0.37%
• DXY 0.13%, DAX 0.48%, FTSE 0.01%, Brent -0.36%, Gold -0.02%
• U.S. Congress poised for a major test on tax legislation
• Need for Brexit transition seen in UK and Europe – Carney
• Markets should not expect ECB to raise asset buys: Mersch
• GB Oct Retail Sales YY -0.3% vs 1.2%, f’cast -0.6%, r’vsd 1.3%
• GB Oct Retail Sales Ex-Fuel YY -0.3% vs 1.6%, f’cast -0.4%
• EZ inflation not greatly impacted by oil price surge: ECB’s Jazbec
• Still appears to be a disconnect between growth and inflation: ECB’s Praet
• EZ Oct Inflation, Final YY 1.4% vs 1.4%, f’cast 1.4%
• EZ Oct Inflation Ex Food & Energy YY 1.1% vs 1.1%, f’cast 0.9%
• BOJ should consider selling put options on Japan stocks: Japan Post Bank CIO
• Banking body head warns about impact of BOJ negative rate policy
• China c.bank adviser expects less forceful deleveraging in 2018

Looking Ahead – Economic Data (GMT)

• 13:30 US Initial Jobless Claims (w/e Nov 11) (mkt 235k, prev 239k)
• 13:30 US Continued Claims (w/e Nov 4) (mkt 1.895 mn, prev 1.901 mn)
• 13:30 US Philadelphia Fed Business Outlook Survey Index (Nov) (mkt 25.0, prev 27.9)
• 13:30 US Import Prices (Oct) (mkt +0.4% m/m, prev +0.7% m/m)
• 13:30 US Export Prices (Oct) (mkt +0.4% m/m, prev +0.8% m/m)
• 13:30 CA Manufacturing Sales (Sept) (mkt -0.3% m/m, prev 1.6% m/m)
• 13:30 CA Securities Cdns C$ (Sept) (prev 12.04B m/m)
• 13:30 CA Securities Foreign C$ (Sept) (prev 9.85B m/m)
• 14:15 US Industrial Production (Oct) (mkt +0.5% m/m, prev +0.3% m/m)
• 14:15 US Factory Output (Oct) (mkt +0.6% m/m, prev +0.1% m/m)
• 14:15 US Capacity Utilization (Oct) (mkt 76.3%, prev 76.0%)
• 15:00 US NAHB Housing Market Index (Nov) (mkt 68, prev 68)

Looking Ahead – Events, Other Releases (GMT)

• 14:00 BoE’s Carney and others participate in a discussion – Liverpool
• 14:10 Fed’s Loretta speaks at a conference – Washington
• 14:10 FRB’s Mester on monetary policy at Cato Institute conference; Washington, DC
• 16:45 FedTrade Operation 15-year Fannie Mae / Freddie Mac (max $515 mn)
• 17:00 SNB’s Maechler speaks at a conference – Geneva
• 18:10 FRB’s Kaplan participates in moderated Q&A session; Houston, TX
• 20:00 Fed’s Williams speaks at FRBSF conference – San Francisco
• 20:00 ECB’s Constancio participates in a panel – Ottawa
• 20:45 Fed’s Brainard speaks at FinTech risks and opportunities conference; Ann Arbor, MI
• 21:30 Fed’s Potter speaks at NASP discussion – New York

Currency Summaries

EUR/USD

• EUR/USD trades heavily within 1.1768-1.1801 in Europe
• Yesterday closed below 55-DMA after 1.1862 stops short 1.1870 cloud top
• Today 10-year German bond yield rebounds to trade over Wed’s highest
• EZ core inflation unchanged at 1.1% yy when f/c lower at 0.9% yy
• EUR 5.7bln vanilla options expiries today 1.1795-1.1825
• Philly Fed at 13.30GMT f/c 25.0 from 27.9. Import/export prices f/c softer

USD/JPY

• 112.76 to 113.33 has been the range this session
• 113.33 — 38.2% retrace of the 114.73 to 112.47 fall — has capped
• Overall bias bearish due to daily close below 112.98 Fibo Wed
• 112.98 — 23.6% retrace of the 107.32 to 114.73 (Sept to Nov) rise
• Scope for an eventual retest of Wed’s 112.47 low as mkt heavy above 113.00
• Market still long of USD/JPY, meaning sell stops layered below vulnerable
• Ldn bought USD/JPY Thurs on EBS first thing, but struggled to gain traction

EUR/CHF

• EUR/CHF having another run at Wed 1.1688 high. 1.1681 the European top
• Wed action did form a reversal on the candles but current lift negating
• The 1.1688 peak has closed the gap on the 1.1713 trend high fm Oct 26
• Upper 30-Day Bollinger the resistance point in between at 1.1701
• SNB’s prior 1.20 floor remains ultimate target for the bulls
• USD/CHF tracks EUR/USD. Doji reversal on candles Wed, higher high Thurs
• Plays 0.9890 to 0.9923 in Europe. 0.9884 was the Asian low
• 21-DMA resistance level at 0.9939 is the next port of call for the recovery

EUR/GBP

• Cable met headwind just shy of 1.32 after rising from 1.3135 (early Ldn low)
• Ascent influenced by Brexit news & UK Oct retail sales data beat
• The Sun says UK PM May preparing to raise Brexit divorce bill offer
• EU’s Verhofstadt “not so pessimistic” abour reaching deal
• UK retail sales +0.3% vs +0.1% f/c, annualized number -0.3% vs -0.6% f/c
• EUR/GBP down to 0.8919 from 0.8967 early Europe high

USD/CAD

• USD/CAD met headwind pre-1.2789 after heading north early Europe
• 1.2789 was 8-day high Wednesday. 1.2754 = low since 1.2789 threatened
• More offers expected near 1.28: USD 679mn 1.2800/10 expiries Friday

AUD/USD

• AUD/USD traded modest 20 pip range thru European am, 0.7581-0.7601
• 0.7609 was Asia high after lowest Aussie jobless rate since 2013
• Huge 1.1100 option expiry for NY cut exerting magnetism over AUD/NZD
• AUD 2.33bln strike. 1.1092 = Thursday high vs 1.0990 low Wednesday

NZD/USD

• NZD/USD eased to test 0.6844 (Tuesday’s low) during the European am
• 0.6818 (2017 low, May & Oct) & 0.6800 are additional support points
• 0.6800 = option barrier level (NZD/USD last at 0.68 in June 2016)
• NZ failed to qualify for 2018 soccer World Cup (Peru won 2-0)

FX OPTIONS

• Sharp reversal for G10 vols after solid gains Wednesday, many fully retrace
• Dealers fear return to spot consolidation in to year end
• USD bears prefer USD put options, limits risk reversal setbacks for now
• Related 1-month expiries remain underpinned by Dec FED, ECB, BoE MPC
• 5.8bln 1.1795-1.1825 EUR/USD expiries today. 1bln each USDJPY at 113.00/50

COMMENT

EUR/CHF may see 1.20 before floor exit’s 3rd birthday
EUR/CHF could test 1.20 before the third anniversary of the Swiss National Bank’s FX floor exit if the euro gets a fresh head of steam up through year-end. Further good economic news out of Germany could be a catalyst, in the wake of Germany’s Q3 GDP beat earlier this week nFWN1NL0IG. The SNB unexpectedly ditched its 1.20 floor on Jan 15 2015, with EUR/CHF tanking to an all-time low of 0.85 that day. The cross reached a high of 1.1713 since then, notched on Oct 26 (ECB dovish taper day). A weaker franc would be welcomed by the Swiss government and the SNB. The Swiss government said Wednesday the CHF remains “highly valued”, echoing the description used by the SNB in its Q3 monetary policy assessment nFWN1NL0IG. 1.2664 is the mid-point of the EUR/CHF lifetime range (1.6828 = Oct 2007 all-time high). The SNB’s Q4 MPA is on Dec 14 (same day as ECB’s final monetary policy meeting of 2017).

CHART FOCUS

USD/JPY bulls have a mountain to climb, expect drop
USD/JPY overall risk is for a drop to the 111.90 Fibonacci level – 38.2% retrace of the 107.32 to 114.73 (September to November) rise – which is very close to where the 30-day lower bollinger-band currently resides at 111.93. Fourteen-day momentum remains negative, reinforcing the underlying bearish market structure. This momentum reading means Wednesday’s 112.47 low is vulnerable for a bearish attack. While the market has made a decent recovery from the 112.47 low, these gains should be seen as purely corrective. Even if bulls manage to break above 113.33 – 38.2% retrace of the 114.73 to 112.47 fall, they will likely struggle to get above the related 113.60/113.87 (50%/61.8% of the same drop) Fibonacci levels. If USD/JPY does manage to register a daily close above the 113.87 level, then the risk of a collapse will be significantly reduced and bulls will regain their footing

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