FX Market Update 6-12

Market Briefs

• EUR/USD 0.02%, USD/JPY -0.38%, GBP/USD -0.47%, EUR/GBP 0.48%
• DXY -0.06%, DAX -1.02%, FTSE -0.14%, Brent -0.65%, Gold 0.12%
• DE Industrial Orders MM Oct, 0.5%, -0.3% f’cast, 1.0% prev
• Swiss CPI rises 0.8% y/y in Nov vs 0.9% f/c
• No Brexit deal this week, Sun political editor cites DUP source as saying
• DUP declines to comment on whether Brexit border deal possible by end of week
• Britain’s May working towards EU summit, progress made in talks – spokesman
• ECB should plan for end of bond buys: Mersch
• Britain has not formally assessed impact of Brexit on economy – Brexit minister
• BOJ’s Masai advocates staying with ‘powerful easing’, warns on side-effects
• China Nov data to show economy facing pressure from debt, pollution crackdowns
• Israel’s shekel dips vs dollar on fears over US Jerusalem decision
• Oil falls after rise in US fuel stocks; doubt grows over global growth
• Gold recovers from 2-month low as dollar weakens

Looking Ahead – Economic Data (GMT)

• 12:15 ADP National Employment Report (mkt +185k, prev +235k)
• 12:30 Productivity (revised Q3) (mkt +3.3% q/q AR, prev +3.0% q/q AR)
• 12:30 Unit Labor Costs (revised Q3) (mkt +0.3% q/q AR, prev +0.5% q/q AR)
• 14:30 EIA Weekly Petroleum Status Report
• 20:00 Treasury STRIPS

Looking Ahead – Events, Other Releases (GMT)

• 13:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.515 bn)
• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $565 mn)
• 15:00 Bank of Canada key policy rate announcement – Ottawa
• N/A ECB Governing council meeting – Frankfurt
• N/A ECB’s Juncker speaks on ESM fund bailout – Brussels

Currency Summaries


• EUR/USD becalmed. Asia 1.1817/48, Europe 1.1812-43 after 1.1801-67 in NA
• Lower bund yield, wider spreads to UST making little or no impact
• Rates weighing on those long EUR, but bad day for stocks likely aids EUR
• CB activity also working to underpin EUR. Russia latest to up intervention
• Rebalancing of USD buying across EM in major FX pairs will prop EUR
• ADP data @ 13.15GMT. EUR 1.7bln exp 1.1800-25 today


• Spot collapsed from 112.62 to hit 111.99 ahead of latest consolidation
• Risk aversion, BoJ commentary & positioning saw bouts of selling in Asia
• BoJ Takako Masai: Japanese inflation skewed to downside
• USD/JPY bears zero in on Fibonacci levels under 112
• USD/JPY longs at risk but mitigated by EBS sales since Nov 28
• Risk off sentiment shows up in Nikkei index which closed down almost 2%


• Friday’s 1.1737-11.1601 range continues to contain EUR/CHF trade
• Cross remains supported ahead of the rising daily cloud, 1.1529/1.1594
• While above the cloud the slow EUR/CHF rise is likely to persist
• Plays 1.1660-1.1693 in Europe. 1.1702 was Tuesday peak
• USD/CHF has gained through the cloud since Friday’s 100-DMA rebound
• Cloud top at 0.9877 while Wed’s high is 0.9888 in Europe. 0.9856 the low
• Bull focus remains on 61.8% & Nov 9 low at 0.9922/23 ahead of NFP Fri


• Cable fell to 1.3362 (1wk low) during European am amid Brexit uncertainty
• DUP leader Foster says will not be rushed on Brexit border text
• Clock is ticking towards “deadline of deadlines” for Brexit divorce offer
• EUR/GBP up to 0.8853 intra-day high during European am
• 0.8868 was Tuesday’s six-day high, before drop to 0.8782
• Telegraph-‘Johnson & Gove lead cabinet revolt’ re: soft Brexit fears


• USD/CAD fell to 1.2657 during the European am. 1.2707 was Asia high
• Bids expected near 1.2644 (55DMA) & 1.2624 (Tuesday’s six-week low)
• BoC is expected to keep its key interest rate at 1.0% at 1500GMT
• CAD could gain if accompanying BoC statement relatively hawkish


• AUD/USD held above 0.7572 & below 0.7600 through the European am
• 0.7572 was Asia low after Australian Q3 GDP data miss
• Bids expected near 0.7550 (0.7551 was last Friday’s low)


• NZD/USD extended north to a 1wk high of 0.6916 during European am
• 0.6870 was Asia low. 0.6908 was Tuesday’s high
• AUD/NZD extended south to 1.0966 during the European am
• 1.1090 was Asia high, before Australian Q3 GDP data miss


• GBP options remain sought amid Brexit uncertainties and spot volatility
• 2-week vol most sought over FED, MPC and EU summit, 10.25 or 214 pips
• EUR/USD stagnation in 1.18-1.19 range weighs on vols
• 3-month EUR vols and puts bid since Monday – likely date of Italy elections
• USD/JPY flow still pre FED expiry strikes between 111-113
• 2-week ZAR 28.0/4.8% over ANC election. O/n CAD 16.0/84 pips over BoC


Fed – Loose financial conditions unlikely to reverse

Yesterday BofA announced plans to buyback an additional $5bn of shares by June 2018. Also yesterday Mastercard approved a new share repurchase program of up to $4bn as well as raising its dividend. The twin themes of share buybacks and increased dividend payments are seen as a boon for financials and tech stocks, especially on the back of tax reforms. However, this does not explain the recent divergence in the performance of the tech sector compared to financial stocks. This is a divergence that has played out in an outperformance of S&P500 vs Nasdaq, as well as increased inflows into financial ETFs over tech ETFs. However, this rotation into financials from tech should be seen as temporary as tech companies dominate the league when it comes to cash held abroad (APPL and MSFT being first and second place).

Remember, however, that when it comes to financials returning cash to investors, its not about the tax code but also the Fed’s decision earlier in the year. The passage of the annual stress tests saw the Fed allow banks to payback 100% of their projected net income over the next four quarters, compared with 65% after last year’s results. This is the first time the figure is 100% since the financial crisis.

The loosening of financial conditions looks unlikely to reverse quickly as equity markets move higher and bond bears find little mileage and USD remains range bound. We think this will allow the Fed, despite discomfort over subdued wages/inflation, to continue to normalize policy by hiking interest rates every quarter until they reach 3.25/3.50% (see “Fed – No reason to pause, risks still asymmetric”; Dec 4 nL8N1O41NX). The risk remains tilted toward the Fed accelerating normalization via its balance sheet, but this is a more likely scenario for 2019. US FCI 01122017


EUR/GBP setup bearish but warning signs emerge

EUR/GBP weekly charts retain a bearish bias and longer term short players can continue to target the 61.8% Fibo of the April to September 0.8315 to 0.9307 rise at 0.8694. Attempts since September to break lower have based in the mid to lower 0.8700s but the weekly cloud twist circa 0.8550 this week could help fuel a deeper move south. Closer to market EUR/GBP is caught between two MAs. The lack of a sustained break/close under the 200-DMA, at 0.8801 on Wednesday, is limiting further weakness while the falling 10-DMA at 0.8857 is capping the upside. There has been no significant move under the 200-DMA since May and short players can consider covering another rebound from there for profit. A break above the 10-DMA would hint at a more substantial rebound but bears should not be too concerned until a sustained break and close inside the daily cloud, which spans 0.8881/0.9020 Wednesday, occurs


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