FX Market Update 5-12

Market Briefs

• EUR/USD -0.01%, USD/JPY 0.04%, GBP/USD -0.49%, EUR/GBP 0.48%
• DXY -0.06%, DAX -0.68%, FTSE 0.01%, Brent -0.24%, Gold 0.01%
• EZ Markit Comp Final PMI Nov, 57.5, 57.5 f’cast, 57.5 prev
• EZ Markit Svcs Final PMI Nov, 56.2, 56.2 f’cast, 56.2 prev
• EZ Retail Sales YY Oct, 0.4%, 1.5% f’cast, 3.7% prev
• DE Markit Comp Final PMI Nov, 57.3, 57.6 f’cast, 57.6 prev
• DE Markit Svcs PMI Nov, 54.3, 54.9 f’cast, 54.9 prev
• FR Markit Comp PMI Nov, 60.3, 60.1 f’cast, 60.1 prev
• FR Markit Svcs PMI Nov, 60.4, 60.2 f’cast, 60.2 prev
• GB Markit/CIPS Svcs PMI Nov, 53.8, 55.0 f’cast, 55.6 prev
• IT Markit/ADACI Svcs PMI Nov, 54.7, 53.2 f’cast, 52.1 prev
• EU to decide on tax haven blacklist, assess US tax reform
• ECB QE data offers further incentive to snap-up Italian bonds
• Oil steadies above $62, expected fall in US inventory supports
• Gold steadies above $1,275/oz as dollar stabilises

Looking Ahead – Economic Data (GMT)

• 12:30 US International Trade (Oct) (mkt -$47.5 bn, prev -$43.5 bn)
• 12:55 US Redbook Same-Store Sales Index (weekly) (prev +4.8% y/y)
• 13:30 CA Trade Balance C$ (Oct) (-2.70B f’cast) (-3.18B prev)
• 13:45 US Markit Services PMI (final Nov) (flash 54.6)
• 14:00 US ISM Nonmanufacturing PMI (Nov) (mkt 59.0, prev 60.1)
• N/A US Atlanta Fed GDPNow (Q4) (prev +3.5% q/q AR)

Looking Ahead – Events, Other Releases (GMT)

• 11:45 FedTrade operation 30-year Ginnie Mae (max $1.405 bn)
• 14:00 Riksbank’s Stefan Ingves will speak at a conference – Stockholm
• 15:00 Senate banking committee vote meetinG for Fed chair – Washington
• N/A ECB’s Constancio participates in a meeting – Brussels
• N/A EU Economic and Financial Affairs meeting – Brussels

Currency Summaries

EUR/USD

• Closed NY 1.1862, 1.1876-42 range today. 1.1830 Mon’s low
• Support daily cloud top 1.1833, 30 Nov low/38.2% of 1.1553-1.1961 1.1809/05
• Initial resistance Mon’s 1.1897 hi, Fri’s 1.1940 hi before 27 Nov 1.1961 range peak
• DXY 93.03-30, Fri/Mon low/hi 92.60/93.36, 100DMA resistance 93.35 now
• US 10yr yld 2.37 vs 2.42 Fri/Mon, 10yr DE/UST 205 vs wide since April 209 Mon
• EU PMI and retail sales fail to excite, looking ahead to US trade and PMI later
• 1-week implied vol break even not pricing much at 86 pips – also gets NFP
• Option risk reversals hold firm EUR call bias, but 3mth better for puts (Italy election)

USD/JPY

• USD/JPY range has been 112.38-112.69 so far
• Asia predominantly sold on EBS to 112.38, 2 ticks above Monday’s 112.36 low
• London bought market in the 112.50s on arrival but failed to crack 112.70
• Bulls face uphill task as Monday’s price action is against them
• Mon’s daily candle had big upper shadow, small real body & no lower shadow
• Technical & positioning supply likely to cause drop below 112
• There is talk of a decent bid below 112.00 which might limit a deeper fall
• NY cut expiries: 112.00 (1.2B), 112.25-35 (430M) & 113.00 (816M)

EUR/CHF

• Slow rise in EUR/CHF likely to persist, fresh 1.1702 rebound high early Europe
• Some intraday easing to 1.1674 but bid returns. Tenkant at 1.1668 helps prop
• Above 1.1641 30-DMA keeps bull trend alive. Ichi cloud supportive, 1.1518/85
• Long players continue to target 1.1737 then the prior floor at 1.20
• 1.1737 = highest since 0.8500 was hit after the SNB removed the 1.20 floor
• Marginal new recovery high for USD/CHF at 0.9869, threatens 0.9867 cloud top
• No clear break seen yet but move above likely as dollar maintains Monday gains
• Thurs high the 21-DMA at 0.9882/83 now key pre-NFP Friday

EUR/GBP

• Cable fell 90 pips to a six-day low of 1.3370 in early European trade
• EUR/GBP simultaneously rose half-a-penny to 0.8868 (six-day high)
• Pound’s losses spurred by absence of Brexit breakthrough Monday
• Britain confident of Brexit deal as May scrambles to win over DUP
• 1.3431 = cable high since 1.3370. 0.8828 = EUR/GBP low since 0.8868
• UK Nov service sector PMI 53.8 vs 55.0 f/c. UK Oct service PMI 55.6

USD/CAD

• USD/CAD down to 6wk low of 1.2641 ahead of North American open
• 1.2656 was Monday’s low (1.2717 = subsequent rally high)
• BoC is expected to keep interest rates unchanged Wednesday

AUD/USD

• A large 0.7645 option expiry for NY cut is helping to anchor AUD/USD
• AUD 622mn strike. 0.7637-0.7650 range for AUD/USD since 0700GMT
• 0.7654 = 3wk high in Asia after Aussie retail sales beat & RBA event risk

NZD/USD

• NZD/USD gravitated from 0.6872 to 0.6900 during the European am
• 0.6900 option expiry for NY cut, NZD 386mn strike. 0.6908 = Asia high
• Spencer said RBNZ has become more flexible on inflation targeting

FX OPTIONS

• GBP options sought amid ongoing GBP volatility and event risk
• 2-week gets EU summit, Cable vol break even 200 pips, EUR/GBP 133 pips
• 3mth EUR puts firmer as expiry (5 March) is likely date for Italy election
• Short dated G10 majors vols propped by impending NFP and CB risk
• Market not pricing much however, suggesting no spot break-out expected pre X-mas

COMMENT

ECB – Mystery unresolved, EONIA ripples beyond O/N

O/N EONIA has come off its highs from last week but it has yet to fully normalise back to around -0.36%. At -0.32%, the fixing yesterday suggests the distortion in the overnight rate has eased, especially as this move has come on the back of declining volumes. After €4.2bn traded on Thursday and €4.4bn Friday, volumes on the O/N were €3.8bn on Monday. However, it has started to ripple to 1wk and 2wk EONIA, where rates are elevated as concern remains that the distortions on the O/N rate will persist. Take a look at the chart below if you are on Thomson Reuters Eikon. While there is a consensus that the explanation for the distortion is related to excess liquidity at a Greek bank (there is only one in the panel for EONIA) uncertainty remains as to why it happened. If the source is related to settlement issues around the recent Greek bond exchange then it might be that the MRO operation that settles tomorrow (new Greek bonds settle today) will help relieve the situation. However, if the Greek banks are now actively moving to wean themselves off expensive ELA funding and thus have excess liquidity, then we may be looking at periods of more persistent distortions.

What is clear is that once the MRO settles on Wednesday, the fix for tomorrow will be keenly watched. If O/N EONIA fails to stabilise then we could be looking at distortions that are a function of an excess liquidity situation at a single Greek bank. The latest episode underscores the ECB’s desire to deliver a new O/N benchmark rate based on a wider sample of transactions beyond the interbank market by 2020 (see ECB – EONIA puzzles, new benchmark before 2020; Dec 1. EONIADEC2017 :

CHART FOCUS

USD/TRY on track for a deeper fall, cloud beckons

USD/TRY looks to be on track for a deeper retreat according to technicals and the pullback could test as low as the 3.70s. The daily Ichi cloud spans 3.7381/3.6554 on Wednesday: a rising and relatively thick cloud often provides decent support and the top of the cloud could prop this correction. With that in mind longer term players can use current easing as an improved opportunity to join the underlying bull trend while above the daily cloud. Intraday price action is pulling farther away from the 10-DMA, which had provided a rough prop since the mid September bounce. The average has flipped to resistance at 3.9209 and showing signs of rolling over. An Harami reversal is playing out on the weekly charts after USD/TRY made a fresh all time high on November 22 at 3.98 but Friday’s close will be watched carefully for confirmation. Overbought weekly trend indicators also favor the correction theory. Note that a break inside the aforementioned daily cloud risks a more substantial reversal and the bears will take over. USD/TRY weekly

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