FX Market Update 25-1

Market Briefs

• EUR/USD 0.05%, USD/JPY -0.23%, GBP/USD 0.14%, EUR/GBP -0.08%
• DXY -0.12%, DAX -0.01%, FTSE 0.03%, Brent 0.47%, Gold 0.12%
• Surging euro forces ECB’s Draghi to tread carefully on policy
• U.S. Treasury’s Mnuchin says not seeking trade war
• At Davos, delegates talk down Trump but bet big on America
• DE Gfk consumer sentiment indicator 11.0, 10.8 f’cast, 10.8 prev
• DE Ifo business climate index Jan, 117.6, 117.1 f’cast, 117.2 prev
• Britain should examine criminal use of cryptocurrencies – PM May
• UK retail sales grow modestly in January – CBI
• Irish PM says wants ‘Norway-plus’ Brexit deal with UK
• Uniform global curbs on cryptocurrency trading may be hard – BOJ official
• Oil hits $71 for first time since 2014 on tighter supply and weak dollar
• Dollar slump drives gold to highest since August 2016

Looking Ahead – Economic Data (GMT)

• 13:30 US Initial Jobless Claims (w/e) (mkt 240k, prev 220k)
• 13:30 US Continued Jobless Claims (w/e) (mkt 1.925 mln, prev 1.952 mln)
• 13:30 CA Retail Sales MM (Nov) (mkt 0.7%, prev 1.5%)
• 13:30 CA Retail Sales Ex-Autos MM (Nov) (mkt 0.8%, prev 0.8%)
• 15:00 US Leading Index Chg MM (Dec) (mkt 0.5%, prev 0.4%)
• 15:00 US New Home Sales-Units (Dec) (mkt 0.679 mln, prev 0.733 mln)
• 15:00 US New Home Sales Chg MM (Dec) (mkt -7.9%, prev 17.5%)

Looking Ahead – Events, Other Releases (GMT)

• 12:45 ECB Governing Council meeting, followed by an interest rate announcement
• 13:30 ECB President Mario Draghi press conference
• 16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $890 mn)
• 18:00 Treasury auctions $28 bn 7-year notes

Currency Summaries

EUR/USD

• EUR/USD quiet ahead ECB today with a tiny bit of profit taking evident
• EUR/USD reached a new trend high in wake of U.S. favour for weak USD story
• Asia 1.2459 peak after NA traded 1.2330-1.2415 yesterday
• Europe today a little lower to 1.2388 ahead IFO data
• Jan IFO matches Nov’s 117.6 record high but expectations sour
• ECB outlook next. 1.2500 barriers weigh. 100/200-HMAs 1.2298-70 underpin

USD/JPY

• Gotobi demand pushed USD/JPY higher in early Asia to 109.48
• Spot then fell to 108.74, then up again Thu. Stuck within 108.68-109.51 pivots
• S-term bears may find the 108.50 level tough to crack on another sell-off
• The 108.50 level is near the 30-week lower bollinger-band
• Talk in Asia that there is a cluster of fresh bids circa the 108.50 level
• Japanese importers and retailers have been good buyers of USD/JPY
• Strong ‘dollar’ policy in question – Reuters News
• MoF flow data week-ended Jan 20 – Japanese net buyers of foreign bonds/stks
• Net Y411.1 bln bonds, Y379.8 bln stocks bought, Y21.9 bln bills too
• Foreigners sell net Y413.4 bln Japan stocks, Y148.2 bln JGBs
• Net Y836.1 bln bills bought however – temporary parking

CHF

• Little sign the dollar demise is fading: USD/CHF sinks below 0.9400
• Spot low of 0.9390 follows Wed’s the Mnuchin non-plus attitude to the USD
• Interestingly the Davos gathering seems to have brought back protectionist fears
• Swissy up on these fears and mkt now waiting for Trump’s input Friday
• EUR/CHF holding heavy but unable to better Wed’s 1.1685 low
• Cross highlighting CHF advantage along with CHF/JPY’s bull bias to 115.87
• EUR cross markets now waiting for the ECB meeting conclusion
• USD/CHF Chart: forex

GBP

• Cable extended north to a new 19mth high of 1.4328 late Asia/early Europe
• 1.4233 = subsequent pullback low (1.4241 was Wednesday’s high)
• Mnuchin says his Wednesday comments on USD were clear and consistent
• EUR/GBP dropped to test 0.8690 before German IFO beat at 0900GMT
• 0.8690 was Dec 8 low after Brexit breakthrough (0.8695 = 1.15 GBP/EUR)
• UK banks last month approved fewest mortgages since Apr 2013 UK Finance

USD/CAD

• USD/CAD fell to an 18-week low of 1.2294 late Asia/early Europe
• 1.2330 = subsequent rally high (1.2318 was Wednesday’s low)
• Canada Nov retail sales data due 1330GMT, +0.7% f/c
• 1.2300 option expiry for NY cut (closest-to-market), USD 230mn strike

AUD/USD

• AUD/USD retreated to 0.8069 after threatening 0.8125 late Asia/early Europe
• Retreat influenced by profit-taking on long positions: 0.8125 was Sept high
• 0.8043 was Asia low (0.8083 was Wednesday’s high)

NZD/USD

• NZD/USD fell to 0.7347 after threatening 0.7392 late Asia/early Europe
• 0.7392 was rally high from 0.7327 low after NZ Q4 CPI miss
• NZD/USD tested 0.7435 (Sept high) when the NZ CPI data was released

FX OPTIONS

• High risk premiums added for ECB – Friday EUR/USD is 109 pips beak-even
• USD drop and related FX moves already forcing G10 vols much higher ahead
• Cable 1-month vol testing resistance and highs since UK elections at 9.25
• USD/JPY 1-month vol trading 1.0 above Tuesday’s 7.25 low
• USD put demand apparent on risk reverals across the board

COMMENT

Pound could still do a lot better against the euro

Just as cable has plenty more room to appreciate if USD-negative sentiment persists, so too could EUR/GBP drop steeply if positivity towards GBP increases. Although the cross has fallen two-and-a-quarter pence in less than a fortnight, at 0.8700 it remains 14.5% above its Brexit referendum day low of 0.7600. It is also nearly as far above the 0.7743 mid-point of its lifetime range, 0.5681-0.9805. While 0.7743 and 0.7600 look bridges too far for even the most optimistic of GBP bulls, there may be scope to drop to a more conservative target such as 0.8333, a level which equates to 1.20 in GBP/EUR. The cross was last at 0.8333 in April 2017 (before rising to 0.9307). The pound could gain if the perceived risk of a disorderly Brexit continues to fall. It could also gain on a further hawkish shift in BoE expectations. Position adjustments may also have a role to play: the net GBP long position held by IMM speculators is dwarfed by the net EUR long.

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