FX Market Update 8-12

Market Briefs

• EUR/USD -0.25%, USD/JPY 0.41%, GBP/USD -0.08%, EUR/GBP -0.19%
• DXY 0.22%, DAX 1.33%, FTSE 0.25%, Brent 0.61%, Gold -0.03%
• DE Exports MM SA Oct, -0.40%, 1.00% f’cast, -0.40% prev
• DE Imports MM SA Oct, 1.8%, 1.1% f’cast, -1.0% prev
• DE Trade Balance, EUR, SA Oct, 19.9B, 21.8B f’cast, 21.8B prev
• FR Industrial Output MM Oct, 1.9%, -0.1% f’cast, 0.6% prev
• FR Budget Balance Oct, -77.20B, -76.30B prev
• GB Industrial Output YY Oct, 3.6%, 3.5% f’cast, 2.5% prev
• GB Manufacturing Output MM Oct, 0.1%, 0.1% f’cast, 0.7% prev
• GB Manufacturing Output YY Oct, 3.9%, 3.9% f’cast, 2.7% prev
• GB Construction O/P Vol YY Oct, -0.2%, 1.9% f’cast, 1.1% prev
• GB Goods Trade Balance GBP Oct, -10.78B, -11.45B f’cast, -11.25B prev
• GB Goods Trade Bal, Non-EU Oct, -2.38B, -3.30B f’cast, -2.98B prev
• EU’s Juncker says brexit talks to enter second phase
• EU’s Juncker says sure EU27 will open next phase of talks
• Japan’s 3Q GDP blows past initial estimates as business investment surges
• China exports growth hits 8-mth high, imports defy pollution curbs
• Decade in the making: post-crisis banking rules finally signed
• Oil stable as strong Chinese demand counters rising dollar
• Gold rises on bargain hunting after hitting over 4-mth low

Looking Ahead – Economic Data (GMT)

• 12:30 US Nonfarm Payrolls (Nov) (mkt +200k, prev +261k)
• 12:30 US Private Nonfarm Payrolls (Nov) (mkt +190k, prev +252k)
• 12:30 US Manufacturing Payrolls (Nov) (mkt +17k, prev +24k)
• 12:30 US Unemployment Rate (Nov) (mkt 4.1%, prev 4.1%)
• 12:30 US Average Hourly Earnings (Nov) (mkt +0.3% m/m, prev 0.0% m/m)
• 12:30 US Workweek Hours (Nov) (mkt 34.4, prev 34.4)
• 13:15 CA House Starts, Annualized (Nov) (215.0k f’cast, 222.8k prev)
• 13:30 CA Capacity Utilization (Q3) (85.0% f’cast, 85.0% prev)
• 14:00 US U of Michigan Consumer Sentiment Index (prelim Dec) (mkt 99.0, prev 97.8)
• 14:00 US U of Michigan Current Conditions Index (prelim Dec) (mkt 115.5, prev 113.6)
• 14:00 US U of Michigan Expectations Index (prelim Dec) (mkt 90.6, prev 87.6)
• 14:00 US Wholesale Inventories (Oct) (mkt -0.4% m/m, prev +0.3% m/m)
• 14:00 US Wholesale Sales (Oct) (mkt +0.8% m/m, prev +1.3% m/m)
• 15:15 US New York Fed Staff Nowcast for Real GDP growth (Q4) (prev 3.93% q/q AR)
• 17:00 US Baker-Hughes Weekly Oil Rig Count (prev 749, +2 w/w, +272 y/y)
• N/A US Atlanta Fed GDPNow (Q4) (prev +3.2% q/q AR)

Looking Ahead – Events, Other Releases (GMT)

• No Fed or Treasury officials scheduled to speak

Currency Summaries

EUR/USD

• Heavy selling of EUR/GBP after EU/UK deal influencing EUR/USD today
• Sellers also encouraged by rates. UST/Bund 10 yr spread widest since mid-Apr
• Huge number option expiries higher. EUR 5.3bln 1.1800-50. EUR 850mln 1.1750
• U.S. jobs data centre stage but average earnings may prove more influential
• Impact earnings data enhanced by weak labour costs data this week
• Support 1.1700-20. Resistance 1.1800-20. Close outside targets 1.1550/1.1950

USD/JPY

• Risk rebound has seen USD/JPY remain buoyant, up from 113.07 to 113.59
• US Congress debt limit extension to Dec 22 helped with risk
• Spot has broken through the daily cloud top at 113.38
• Bulls are slowing chewing their way through offers above 113.50
• Scope grows for gains to the 113.81 Fibo — 76.4% of 114.73-110.85 fall

EUR/CHF

• USD/CHF continues to gain, above 76.4% Nov-Dec drop at 0.9967 to 0.9971
• Highest since Nov 14. Nov 13 0.9987 peak is the resistance just above
• Pulling further away fm the daily cloud, fuels expectations of a parity test
• 76.4% break targets above parity and a full retrace to the Nov 1 1.0038 peak
• Nov 1 1.0038 practically a dble top with Nov 27 1.0039 high = strong resist
• Solid NFP/AHE reports Fri would also help put 1.00+ within reach again
• EUR/CHF holds close to it’s 1.1737 post-SNB floor removal peak fm Dec 1
• 1.1719 to 1.1690 Friday in Europe but bid returns ahead of NY

EUR/GBP

• EUR/GBP down to six-month low of 0.8690 on Brexit breakthrough
• Pound up to 18-month highs vs JPY & CHF. Cable up to 1.3521
• 1.3521 = three-day high (1.3320 was Thursday’s low)
• Stops tipped above 1.3550 (recent two-month high, Dec 1)
• 0.8734-47 is now a EUR/GBP resistance window
• Window encompasses July, Sept & Nov lows

USD/CAD

• USD/CAD revisited 1.2868 during the European am after rising from 1.2849
• 1.2868 was Thursday’s high. Offers expected near 1.29 if ascent extends
• USD/CAD was trading just under 1.29 into strong Canada jobs data Dec 1
• Pair was trading sub-1.27 into BoC’s dovish hold Wednesday

AUD/USD

• 0.7518 = AUD/USD high since fresh six-month low of 0.7501 in Asia
• Bids are tipped just under 0.7500 (mooted option barrier level)
• 0.7506 was Thursday’s low, after Dalian iron ore fell 7.5%
• Dalian iron ore closed down 1.2% Friday having been -4.4% at one stage

NZD/USD

• NZD/USD topped out a pip shy of 0.6851 after firming from 0.6823
• 0.6851 was rally high from Thursday’s European session low of 0.6829
• 0.6823 = 1wk low in Asia. 0.6817 was Dec 1 low. 0.6781 = Nov low

FX OPTIONS

• GBP vols hammered as risk premiums pared on Brexit deal, 1mth vol off over 1.0
• EUR/USD vols unfazed by weaker spot, but 3mth puts bid over Italy election
• USD/JPY still well contained so no rush for vols or topside cover
• AUD/USD vols supported as 0.7500 barrier tested
• Short dated vols underpinned over NFP and CB risk, but premiums rather tame

COMMENT

Watching Schatz as 3m EUR X-ccy basis widens further

The 3m EUR cross currency basis swap (x-ccy) has moved further into negative territory, reflecting dollar shortage/demand ahead of year-end as well as constraints on arbitrage as a result of balance sheet capacity. At -76bps, the EUR x-ccy basis has moved sharply from -54 last week, but more importantly it is acting like it is already year-end. While there was a pre-year end move last year, the spike did not happen until we had got closer to the last week of the year. The pressures this time round seem more intense and suggest a likelihood that lower liquidity in the short dated forwards will spill over into USD demand in the spot market.

Something that will be watched is whether German bunds will experience similar sort of year-end related scarcity issues that saw spreads widen and sharply negative repo rates as last year. There is no early indication of such scarcity, but this will continue to be watched ahead of year-end. However, over the course of the last 2-weeks the Schatz yield has been moving sharply toward the bottom of its recent trading range. A break of yield support at -0.766% on the Schatz could provide early signs that scarcity is becoming an issue.
SCHATX8122017 :

CHART FOCUS

USD/CHF bulls face little resistance as parity eyed

Parity is within reach for USD/CHF bulls as the pair continues to gain to new short term daily highs. On Friday spot is seen testing 0.9970, just above the last Fibo of the November to December fall at 0.9967. A sustained break above the 76.4% Fibo level puts the 1.0038 November 1 peak in sight. The 1.0038 high is practically a double top with the October 27 1.0039 peak and reinforces resistance at that level. Friday’s new top is the highest USD/CHF has traded since November 14 when 0.9987 was the daily high. The rebound from 0.9736 on December 1 has cleared the daily cloud and the pull further away from its top at 0.9897 is fuelling expectations of further gains. The upper 30-Day Bollinger at 1.0053 is among bullish objectives following Thursday’s break and close above the 30-DMA at 0.9910. The average lies close to the aforementioned daily cloud top and only a break back below those supports would deter the bulls

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