FX Market Update 21-11

Market Briefs

• EUR/USD 0.05%, USD/JPY -0.11%, GBP/USD -0.06%, EUR/GBP 0.12%
• DXY -0.04%, DAX 0.48%, FTSE 0.22%, Brent 0.32%, Gold 0.27%
• Bank of England rate-setters air differences over rate hike
• UK factories enjoy best month for new orders since 1988 – CBI
• UK borrowing grows in October, underscoring budget headache for Hammond
• NAFTA nations lock horns on U.S. auto demands as fifth round ends
• China to step up property market regulation to avoid bubble risk
• Japan may cut CPI, growth estimates in midterm report – sources
• GB PSNB Ex Banks GBP Oct, 8.040B, 7.0B f’cast, 5.902B prev
• GB PSNB, MM GBP Oct, 7.464B, 6.600B f’cast, 5.326B prev
• PSNCR, MM GBP Oct, -3.773B, 11.205B prev
• French-German bond yield spread returns to pre-crisis levels
• Oil rises ahead of OPEC meeting as further output cuts expected
• Gold edges higher, Fed minutes in focus

Looking Ahead – Economic Data (GMT)

• 12:30 US Chicago Fed National Activity Index (Oct) (prev 0.17)
• 12:30 US Philly Fed Nonmanufacturing Business Outlook Survey
• 12:55 US Redbook Same-Store Sales Index (weekly) (prev +2.3% y/y)
• 13:30 CA Wholesale Trade MM (Sep) (0.3% f’cast, 0.5% prev)
• 14:00 US Existing Home Sales (Oct) (mkt 5.43 mn SAAR, prev 5.39 mn SAAR)

Looking Ahead – Events, Other Releases (GMT)

• 15:00 ECB’s Coeure participates in conf. in Frankfurt, Germany
• 15:45 FedTrade Operation 15-year Fannie Mae / Freddie Mac (max $520 mn)
• N/A Central and Eastern European c. bankers at an economic conf. in Vienna
• N/A French Finmin Bruno Le Maire, EU antitrust chief speak at innovation conf.
• 22:00 Fed’sYellen participates in moderated discussion, “In Conversation with Mervyn King”; NY

Currency Summaries

EUR/USD

• Asia traded a range today below the 100-DMA (1.1752) 1.1730-1.1749
• Europe saw a short-lived pop over this mark to 1.1758
• Pair then drops to 1.1714 before returning 1.1740-45 ahead NA
• Bearish short-term techs weighing on traders sitting long
• Choppy directionless trade likely until major data 1st week of Dec
• Mid/long-term outlook bullish EUR/USD may hold 1.16-1.18 until then

USD/JPY

• USD/JPY runs into offers ahead of Mon’s 112.71 peak
• Narrow 112.41-70 range so far this session
• Rebound from Mon’s 111.89 low faltering, tenkan @112.98 ultimately weighs
• Relapse likely to focus on the daily cloud top which comes in at 111.94
• Decent sized 112.00 expiry worth USD 1Bln also beckons bears
• EBS Flows: Overall net buys on the toy

EUR/CHF

• The 30-DMA continues to support EUR/CHF, above keeps the bulls in control
• Offered in Europe, 1.1670 to 1.1642. 200-HMA at 1.1635 support
• Rebound eyes upper 30-D Bolli at 1.1706, Fri trend high at 1.1723
• 1.1723 = highest since 0.8500 was hit after the SNB removed the 1.20 floor
• Daily Ichi cloud is rising and supportive, 1.1506 is the top of the cloud
• USD/CHF sideways, tight 0.9920-0.9940 range, below 21-DMA at 0.9954
• Range breakout looks unlikely for now
• Swiss trade surplus narrows to CHF2.33 bln in Oct

EUR/GBP

• Cable elicited fresh support pre-1.3222 after retreating from 1.3267
• 1.3267 = early Europe intra-day high. 1.3222 was Monday’s Asia high
• Prior retreat from Monday’s 18-day high of 1.3279 based 2 pips pre-1.3222
• EUR/GBP fell to an eight-day low two pips shy of 0.8841 early Europe
• 0.8841 = Nov 13 low & 61.8% of 0.8734-0.9014. Subsequent high: 0.8875
• UK budget gap unexpectedly widened in Oct. Hammond budget plan Weds

USD/CAD

• 1.2790 = USD/CAD since 19-day high of 1.2837 during European am
• Turnaround influenced by AUD/USD short-covering after Lowe speech
• Asia range was 1.2804-1.2820 (1.2824 was last Friday’s high)
• Huge 1.2750 option expiry for NY cut, USD 1.5bln strike

AUD/USD

• AUD/USD rose half-a-cent to 0.7584 after RBA’s Lowe spoke at 0905GMT
• Lowe said “more likely” next move in rates is up rather than down
• However, Lowe said “not a strong case” for near-term change in rates
• Offers expected near 0.76: AUD 505mn 0.7600 option expiry Wednesday
• 0.7532 was 5mth low for AUD/USD in Asia, after dovish RBA minutes

NZD/USD

• NZD/USD was helped to 0.6826 European am top by AUD gains after Lowe
• 0.6791 was European am low (pre-Lowe). 0.6790 was Asia low
• AUD/NZD rose to 1.1110 during the European am, after Lowe
• 1.1069-1.1093 was Asia range. GDT auction result expected circa 1430GMT
• NZD/USD 0.6815/20 option expiries for NY cut, NZD 258mn strikes
• AUD/NZD 1.1090 expiry for NY cut, AUD 200mn strike

FX OPTIONS

• G10 vols heavy as US holiday looms and dealers trim decay costs
• EUR/USD vols slip, but FED and ECB underpin 1-month vol
• GBP 1-month vols propped by FED/MPC and key EU summit/Brexit talks
• USD/JPY downside fears abate, vols and JPY call bias lower today
• ZAR event risk in to ratings and ANC elections prop 1-week, 1-month vols

COMMENT

Germany headed for early elections/Merkel exit?

The next few days will focus on German President Steinmeier attempting to find a solution to the political crisis after the failure of talks to form a new government over the weekend. However, with a grand coalition (CDU/CSU/SPD) or the Jamaican coalition (CDU/CSU/Greens/FDP) both unlikely and a minority government not favoured by Merkel, the road now seems to lead to an early election. There is a maximum 60 days for when the Bundestag is dissolved and the election, so one is likely in the spring. However, while its early days, the polls suggest there will be no radical changes to the current makeup of votes from the September elections. This will leave Germany with the same options as those that are currently unpalatable, which may require Merkel to exit to help break the deadlock. This is a scenario that is least talked about currently, as hopes are raised that either the SPD or FDP will change their stance, or that polls will shift in a favourable direction toward Merkel. What was clear at the September election was the loss of support for the CDU, CSU, and SPD, while there was increasing popularity for the far-right AfD. Likely new elections in Spring 2018 could help boost support for the AfD further. The situation is fluid and there are plenty of scenarios to work with, but markets should be comforted by the fact that risk assets have been able to digest political surprises with ease over the last 12-18 months. The US Presidential election and UK’s EU referendum results failed to dent the rally on risk assets and the enthusiasm to buy dips.

CHART FOCUS

EUR/GBP on track for a deeper retreat

EUR/GBP is on track for a full retracement of the November 0.8734 to 0.9014 climb. The cross set a fresh eight day low Tuesday close to 0.8840–the 61.8% of the aforementioned rise. A break opens the path to a drop to the Nov 1 rally origin at 0.8734. EUR/GBP has strong support from the 200-DMA and the lower 30-day Bollinger at 0.8781 and 0.8774 respectively which bears may struggle to overcome. There has been no close under the 200-DMA since May and the 0.8734 bounce came from a false break of that line, while the Bollinger bands historically contain trade and could be a stalling point for the latest descent. However, a shooting star reversal is playing out nicely on the candlesticks from last week and further weakness remains favored below the daily Ichi cloud. The cloud base lies at 0.8930 and selling into corrective upticks below there is a good strategy for a target in the lower 0.87s. Should any rally clear the cloud base then control would return to the bulls.

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