FX Market Update 12-1

Market Briefs

• EUR/USD 0.79%, USD/JPY -0.12%, GBP/USD 0.73%, EUR/GBP 0.07%
• DXY -0.52%, DAX 0.22%, FTSE 0.22%, Brent -0.13%, Gold 0.65%
• FR CPI (EU Norm) Final YY Dec, 1.2%, 1.3% f’cast, 1.3% prev
• FR CPI (EU Norm) Final MM Dec, 0.4%, 0.4 % f’cast, 0.1% prev
• FR Inflation Ex-Tobacco Idx Dec, 101.76%, 101.47% prev
• IT Industrial Output MM SA Nov, 0.0%, 0.6% f’cast, 0.5% prev
• IT Industrial Output YY WDA Nov, 2.2%, 3.3% f’cast, 3.1% prev
• Euro zone investors price in 70 pct chance of ECB rate hike by year end
• China’s trade boom hits speed bump as Dec imports growth slows sharply
• German economy likely slowed in late 2017 but will be strong in 2018-ministry
• Shock reaction to BOJ bond buying cut makes stimulus exit a challenge
• Japan’s retailers struggle to raise prices, even as economy gains momentum
• Oil slips away from 2014 highs, though overall 2018 outlook remains firm
• Gold set for 5th week of gains, buoyed by slump in dollar

Looking Ahead – Economic Data (GMT)

• 13:30 Retail Sales (Dec) (mkt +0.5% m/m, prev +1.0% m/m)
• 13:30 Retail Sales ex-Autos (Dec) (mkt +0.4% m/m, prev +1.0% m/m)
• 13:30 Retail Sales ex-Autos and Gas (Dec) (prev +0.8% m/m)
• 13:30 Control Retail Sales (Dec) (mkt +0.4% m/m, prev +0.8% m/m)
• 13:30 CPI (Dec) (mkt +0.2% m/m, +2.2% y/y; prev +0.4% m/m, +2.2% y/y)
• 13:30 CPI ex-Food and Energy (Dec) (mkt +0.2% m/m, +1.8% y/y; prev +0.1% m/m, +1.7% y/y)
• 13:30 Real Average Weekly Earnings (Dec) (mkt +0.1% m/m, prev +0.1% m/m)
• 15:00 Business Inventories (Nov) (mkt +0.3% m/m, prev -0.1% m/m)
• 16:00 Cleveland Fed CPI (Dec) (mkt +0.1% m/m, prev +0.2% m/m)
• 16:15 New York Fed Staff Nowcast for Real GDP (Q4’17) (prev +4.0% q/q AR)
• 16:15 New York Fed Staff Nowcast for Real GDP (Q1’18) (prev +3.4% q/q AR)
• 18:00 Baker-Hughes Weekly Oil Rig Count (prev 742; -5 w/w, +213 y/y)
• 19:30 New York Fed Underlying Inflation Gauge (Dec) (prev +2.95% y/y)
• N/A Atlanta Fed GDP Now (Q4) (prev +2.8% q/q AR)

Looking Ahead – Events, Other Releases (GMT)

• 16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac
• 17:30 FRB Philadelphia’s Harker at Chamber of Commerce; Ivyland, PA
• 21:15 FRB Boston’s Rosengren; La Jolla, CA

Currency Summaries

EUR/USD

• EUR/USD breaks to a 3-year high at 1.2137 (range 1.2031-1.2137)
• 50% the ECB inspired drop from 1.3995 to 1.0340 is next target at 1.2167
• Break would shift focus to 61.8% of that move which is 1.2599
• Minor levels @ Dec 31 2014 peak at 1.2170, Dec 30 1.2188 and Dec 29 1.2220
• Scarcity of vanilla option expiries higher hints at short gamma market
• Attention next on U.S. CPI @ 13.30GMT. YY core f/c @ 1.7%

USD/JPY

• EUR/JPY runs into offers ahead of 134.85, as EUR/USD takes cross higher
• USD/JPY sees drop from 111.44 to 111.00, so far bids at the low hold firm
• There has been sustained selling of USD/JPY since late Asia/early London
• Spot still on course for slide to 110.00 barriers eventually
• Fourteen-week momentum is negative after being positive since mid Oct
• This signals a shift in the underlying bias of the market
• Bulls will be hoping that US CPI data will lead to a change in fortunes

CHF

• USD/CHF sharp three-day drop from 0.9845 nears key Jan 2 0.9700 low
• Next support 0.9658, 61.8% 0.9422-1.0039 Aug 17-Oct 27 bull run
• Current slide just being tamed by lower 30DMA Bollinger at 0.9699
• Broad based USD losses ahead of key U.S inflation data 13:30 GMT
• Clear break and close below 0.9700 possible on data disappointment
• EUR/CHF briefly above recent range highs to 1.1788
• EUR/USD clear above 1.2100 on hawkish ECB fallout and German coalition news

GBP

• EUR/USD rise inspires a GBP/USD rally to 1.3620 (range 1.3538-1.3620)
• Hawkish ECB spurs yield rise with bund having knock-on affect for gilts
• UK 10 year yield has rallied 7bp since hawkish ECB minutes
• U.S. yields static so UK/US 10 year spread narrows by similar margin
• GBP/USD up in reaction but sellers emerging ahead 2017 high at 1.3659
• Stops tipped above 1.3650. Close on Jun 24 2016 (UK ref) was 1.3700

USD/CAD

• USD/CAD 1.2510-1.2554 today vs 1.2516-90 Thursday
• Weaker USD tone weighs. Support 10DMA 1.2496. resistance 100DMA 1.2592
• Reduced sentiment for Jan 17 BoC rate hike on NAFTA angst weighs on CAD
• Canada increasingly convinced Trump will pull out of NAFTA
• Options still pricing high volatility over BoC – break even for event around 100 pips

AUD/USD

• AUD/USD peaked 0.7906 in Asia, new high since Sept
• USD weakness underpins, next focus for USD is CPI data 13.30GMT
• Another close above 200DMA today 0.7855 will add to bullish bias
• 0.7887 is 61.8% of 0.8125-0.7501 Sept-Dec drop, next target 76.4% at 0.7978
• AUD/NZD holds support 200DMA 1.0834, may help limit AUD setbacks

NZD/USD

• NZD/USD continues bull run to late Sept highs at 0.7276 today
• Setback to 0.7237 since and last 0.7259.
• Next resistance 0.7281 – 76.4% Fibo of Sep/Nov decline
• AUD/NZD support at 200DMA 1.0834 holds, limits further NZD gains for now

FX OPTIONS

• G10 vols up across the board, EUR/USD vols lead. Optiosn target 1.2500
• Break above 1.2100 barriers. Topside demand lifts EUR call bias
• USD/JPY targets Sept low 110.85, 110.00 barriers thereafter
• GBP vols value from long term lows as key UK data and MPC looms
• 2.5bln EUR expiry at 1.2100 today. 1.2bln 111.00 in USD/JPY

COMMENT

Rates, positioning favour EUR/USD rise to 1.25-1.26

EUR/USD has solid ground to rally towards 1.25-26 following Thursday’s hawkish sounding ECB minutes which spurred a spike above 2017/18 highs to 1.2137. The rally is impressive as while 2017’s 1.0600-1.2092 rise was fuelled by specs turning from shorts to longs, traders are now long of 16 billion euros. With EUR shorts during the euro zone crisis reaching 25 billion before a major EUR/USD turn, they may be far from too long. Unlike in 2017 when EUR/USD gains were curbed by US/German bond yield differentials, this year’s move is being supported by rates. A closing break above the 200-WMA at 0.506% for 10-year German Bund yields today and a break of the 2017 high for 2-year yileds at -0.53%, will substantially add to support from rate markets. EUR/USD bulls’ sights are now on 1.2167, which is a 50% retracement of the entire 1.3995-1.0340 drop inspired by ECB monetary policy. A break will target 61.8% of that move at 1.2599. EUR/USD weekly chart: http://reut.rs/2Dng345

CHART FOCUS

EUR/USD due big gains, momentum at multi-year high

EUR/USD may be entering a new bullish cycle which could see gains to the 1.2500 psychological level. Near-term scope is for a break through the 1.2168 Fibonacci level — 50% retrace of the 1.3995 to 1.0340 (2014 to 2017) fall — above which will confirm that a readjustment higher is underway. January’s 14-month momentum so far is showing the most positive reading since August 2011, highlighting the long-term market structure is very bullish. Spot on Friday managed to break the 1.2097 Fibonacci level — 38.2% of the 1.4940 to 1.0340 (2011 to 2017) fall — a level which had for months frustrated bulls. A close above that Fibo at the end of January is key for confirming long-term direction. Failure to register a monthly close above 1.2097 will signal that long-term bulls are trapped and see another correction

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