FX Market Update 29-1

Market Briefs

DE Import Prices YY Dec, 0.3%, 0.2% f’cast, 0.8% prev
IT Producer Prices YY Dec, 2.0%, 2.5% prev
ECB will only stop pumping out cash when confident about inflation- Praet
China eyes black swans, gray rhinos as 2018 growth seen slowing to 6.5-6.8 pct – media
U.S. lawmakers at NAFTA talks express optimism about modernizing trade pact
Challenged on all fronts, Britain’s May faces pressure over Brexit law
Growing credit card conundrum fuels British bank concerns
Oil dips as U.S. output rises, still set for strongest January in five years
Gold slips as U.S. dollar claws back some ground

Looking Ahead – Economic Data (GMT)

13:30 Personal Income (Dec) (mkt +0.3% m/m, prev +0.3% m/m)
13:30 Consumption Expenditures (Dec) (mkt +0.4% m/m, prev +0.6% m/m)
13:30 PCE Deflator (Dec) (mkt +0.3% m/m; prev +0.2% m/m, +1.8% y/y)
13:30 Core PCE Deflator (Dec) (mkt +0.2% m/m, +1.6% y/y; prev +0.1% m/m, +1.5% y/y)
10:30 Dallas Fed Texas Manufacturing Outlook Survey (Jan) (prev 29.7)

Looking Ahead – Events, Other Releases (GMT)

N/A ECB’S Lautenschläger, Basel’s Ingves, European Banking Authority’s Enria and Bundesbank’s Dombret speak at Frankfurt
16:00 ECB’s Coeure will be meeting the Commission Economics and Financing of MEDFEF
16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $890 mn)
20:00 New York Fed publishes tentative agency MBS operation schedule for period beginning January 30

Currency Summaries

EUR/USD

EUR/USD 1.2389-1.2429 range in Europe. 1.2385-41 in Asia
Shallow correction stalls 1.2370 Friday after 1.2538-1.2364 whip Thursday
Traders unsure about US USD policy but many think ECB hamstrung in terms EUR
Rally stalled but bullish techs are influencing a buy dip strategy since
U.S. data boosting rates but higher U.S. rates leading all yields up
Dulling potential widening US/Bund spreads, so blunts FX impact, for now
However, all components for prices within Q4 U.S. GDP data were higher
Big rises/multi-year peaks raise the importance of today’s PCE/income data
Core December U.S. PCE at 13.30GMT is f/c unchanged at 1.5% yy

USD/JPY

USD/JPY bias likely to remain down with focus still on weak USD, US trade
Central bank expectations and int rate differentials mostly shrugged off
JPY shorts look like a proxy for stocks
USD/JPY important Fibo and Sept 2017 low beckons
Near-term USD/JPY recovery from 108.51 Asia low stalled above 109.05
Talk there are offers which should continue to cap circa 109.00

CHF

Impressive four day rally by the CHF into Friday’s 1.1588 high vs EUR
Cross support gave out into Fri’s close, daily cloud, 30DMA Bolli and 100DMA
Dollar’s capitulation vs CHF outstripping EUR/USD’s rally by some margin
USD/CHF close below 200WMA w/e Jan 19 confirmed by a 3.7% decline w/e 26
Both cross and spot finally gaining traction but still advantage to bears
Swiss sight depos latest wk: domestic flows fall and total rise nEONI1Q0S7
EUR/CHF Daily Chart:

GBP

Cable fell to 1.4088 with EUR/GBP rising to 0.8808 during the European am
0.8808 = 1wk high. Increasing pressure on PM May is helping weigh on GBP
If May is toppled, most of the options to replace her could depress the pound
Jacob Rees-Mogg, Boris Johnson and Michael Gove among names-in-frame
1.4084 is a cable support level, Jan 25 low after Trump talked up the USD
Additional supports 1.4050, 1.4030 (Jan 23 high) and 1.4000

USD/CAD

USD/CAD rose to test 1.2353 (Asia high) during the European am
1.2350 option expiry Tuesday, USD 300mn strike
Bids expected around 1.2300 (1.2306 = Asia low, 1.2294 was Friday’s low)

AUD/USD

AUD/USD eased to test 0.8080 during European am then rose to 0.8106
0.8080 was Asia low. 0.8118 was Asia high (before drop to 0.8080)
Key resistance 0.8136 (Friday’s 32mth high)

NZD/USD

NZD/USD rose to 0.7340 after threatening 0.7318 during European am
0.7318 was Asia low. 0.7363 was Asia high (before drop to 0.7318)
Last week’s range was 0.7289-0.7437 (high before low)

FX OPTIONS

USD put demand is tailing off in many of the G10 majors as USD losses stall
1-week EUR/USD risk reversals regain a USD call bias from 0.8 USD puts last week
USD/JPY still wary of deeper losses, notable demand for JPY call hedges to 105.00
Cable 1-month vol new high since June to highlight recent GBP spot volatility
Cable 1-month risk reversals lose multi year high GBP call bias as GBP retreats

COMMENT

Persistent top-picking suggests bigger EUR/USD rally

The persistence of top picking has likely been a key factor supporting EUR/USD in the past year and it’s spillover into this year suggests an even bigger rally is in the offing. The number of euro shorts may have been more than halved with EUR/USD rising from 1.0450 last April above 1.25 this year, but shorts are still large. It’s the prior gigantic size of short betting that still exceeds current record longs that makes the reduction in shorts seem significant. However, there are still more than EUR 14 billion of euro shorts in existence and it’s clear from the strength and pace of the EUR/USD uptrend that those trying to pick tops have lost money and their stops have helped fuel the rise. The existence of a large short position raises significant doubt as to the importance of recent highs over 1.2500. The repeated failure of opponents of EUR/USD optimists is cause to expect further EUR/USD gains. Eur short position:

CHART FOCUS

USD/JPY faces deeper fall, Sept 2017 low beckons

USD/JPY risks a deeper fall to the September 2017 107.32 low after bears closed at the end of last week below the weekly cloud base which currently resides at 109.11. Equally important was the weekly close below the 109.07 Fibonacci level — 76.4% retrace of the 107.32 to 114.73 (September to November 2017) rise. An eventual break below the 107.32 level will open the way to the major 106.51 Fibonacci level — which is 61.8% retrace of the 99.00 to 118.66 (2016 to 2017) rise. USD/JPY formed a long black candlestick last week, which highlights the acceleration of the downtrend from the 114.73 November peak and the increasingly negative bearish market structure. Only a failure to register further weekly closes below the aforementioned 109.07 Fibonacci level will ease downside pressure and provide an early warning that the bear cycle may be coming to an end.

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