FX Market Update 31-1

Market Briefs

EUR/USD 0.33%, USD/JPY 0.06%, GBP/USD 0.01%, EUR/GBP 0.31%
DXY -0.22%, DAX 0.27%, FTSE -0.06%, Brent -0.64%, Gold 0.36%
Fed expected to keep interest rates steady as Yellen era ends
ECB won’t be too hasty in ending bond buys: Coeure
EU Inflation, Flash YY Jan, 1.3%, 1.3% f’cast, 1.4% prev
EU Infl Ex Food & Enr Flash Jan, 1.2%, 1.0% f’cast, 1.1% prev
EU Unemployment rate Dec, 8.7%, 8.7% f’cast, 8.7% prev
FR CPI (EU Norm) Prelim YY Jan, 1.5%, 1.1% f’cast, 1.2% prev
DE Retail Sales YY Real Dec, -1.9%, 2.8% f’cast, 4.4% prev
DE Unemployment Chg SA Jan, -25k, -17k f’cast, -29k prev
DE Unemployment Total NSA Jan, 2.570M, 2.385M prev
DE Unemployment Rate SA Jan, 5.4%, 5.5% f’cast, 5.5% prev
DE Unemployment Total SA Jan, 2.415M, 2.442M prev
IT Unemployment Rate 10.8% Dec, 10.9% f’cast, 11.0% prev
GB GFK Consumer Confidence Jan, -9, -13 f’cast, -13 prev
BOJ hoses down market speculation of early stimulus exit
Oil drops for a third day; set for strongest January since 2013
Gold rebounds as dollar slips, but seen as vulnerable

Looking Ahead – Economic Data (GMT)

13:30 CA GDP MM Nov (prev 0.0%)
13:30 CA Producer Prices YY Dec (prev 2.7%)
13:30 CA Raw Materials Prices YY Dec (prev 14.2%)
13:55 US Redbook Same-Store Sales Index (weekly) (prev +3.8% y/y)
14:00 US S&P CoreLogic Case-Shiller 20-City HPI (Nov) (mkt +6.4% y/y, prev +6.4% y/y)
15:00 US Consumer Confidence (Jan) (mkt 123.0, prev 122.1)
15:00 US Homeownership Rate (Q4) (prev 63.9%)
15:30 US Dallas Fed Texas Service-Sector Outlook Survey (Jan) (prev 18.1)
15:30 US Dallas Fed Services Revenues Index (Jan) (prev 24.4)

Looking Ahead – Events, Other Releases (GMT)

16:45 FedTrade operation 30-year Ginnie Mae (max $840 mn)
18:00 FOMC begins two-day policy meeting (see Fed Outlook )

Currency Summaries

EUR/USD

EUR/USD a quiet 1.2425-63 range in Europe ahead the Fed at 17GMT
Core euro zone inflation rose to 1.2% yy from 1.1% and vs f/c 1.0%
German jobless rate falls to a new record low at 5.5%
German retail sales plunge 1.9% in December compared a 2.8% f/c
Month-end EUR/USD demand expected. EUR/GBP buying prominent so far
EUR 3.6bln option expiries @ 1.2500 are both resistance and potential magnet

USD/JPY

Structurally negative, talk selling should outweigh buying into Feb
Range of 108.60-109.09 so far this session, small risk both side from Fed
Said to be decent offers above 109.00 which will stem near-term gains
Meanwhile bids now clustered around 108.30, recall 108.28 was Fri’s low
Some action after BoJ AM operations & increased 3-5year buys, USD capped

GBP

Cable rose to 1.4213 in early European trade before sliding to 1.4122
Rise to 1.4213 was aided by expectations of large month-end USD selling
Month-end buying of EUR/GBP influenced the drop to 1.4122
Cross up 45 pips to 0.8816 in approximately 30 minutes through 1000GMT
1.4122 approximates to 38.2% of 1.3980 (Tuesday’s low) to 1.4213
EU officials reject City of London’s Brexit blueprint for banks – sources

USD/CAD

USD/CAD fell to a four-month low of 1.2272 in early European trade
Fall accompanied talk of large month-end USD selling
Subsequent rally topped out just shy of 1.2300 (former support point)

AUD/USD

AUD/USD is eyeing 0.8113 after extending north from 0.8046
0.8113 was Tuesday’s high. 0.8046 was Asia low after Aussie CPI miss
Mooted offers at 0.8125/40 are an appreciation obstacle beyond 0.8113
0.8136 was last week’s 36-month high (0.8043 = subsequent low)

NZD/USD

NZD/USD has risen to one-week high of 0.7405 as month-end looms
Ascent accompanies expectations of large month-end USD selling
Key resistance 0.7435 (Sept high), tested before NZ CPI miss last week

FX OPTIONS

Trumps SOU failed to excite, risk recovers marginally, realised vol peaks, implied vols suffer
FED tonight but nothing expected, potential for deeper vol setbacks in its wake
EUR/USD risk reversals have fully retraced recent gains for EUR calls – spot top in place
GBP/USD risk reversals back at neutral from a record high topside bias – spot top in place
AUD/USD vols took a hit after CPI failed to alter likely RBA rate path

COMMENT

BoE’s Carney gives cable bulls green light

Cable bulls are back in the driving seat, with scope to retest January’s 1.4346 peak, after Bank of England Governor Carney leant hawkish in a statement on Tuesday and today’s Fed policy statement unlikely to give USD much of a boost. Carney’s comment that the c.bank was turning its focus back to bringing down inflation helped GBP/USD trade the fourth largest daily range of the month, shifting the underlying bias back to the upside. Cable had been under pressure this week due to political uncertainty surrounding PM May’s future and from leaked studies which suggested that Britain would be worse off in three Brexit scenarios. Crucially, GBP/USD found support at 1.3980 on Tuesday just ahead of the 1.3975 Fibonacci level — 23.6% retrace of the 1.3027 to 1.4346 (October to January) bullish cycle. With no updated dot plots, economic projections or press conference from Yellen’s last meeting as Fed chair, only an ultra-hawkish policy statement will halt cable’s advance. Daily Bollinger Chart

Month-end flows and rebalancing to underpin EUR/USD

Two powerful forces are set to underpin EUR/USD today. The first of these and the factor gaining the greater attention are expectations for large dollar selling in relation to month-end. Judged by the dollar’s performance since knowledge of this month-end analysis became widespread yesterday there are either large dollar selling flows ongoing for month-end or speculators are betting big on the prospect of that selling. There may be a sting in the tail as should these flows not materialize then the biggest flow of the day will be an unwinding of dollar shorts. Action around today’s major fix at 1600GMT will likely be key. The other factor that has gone largely under the radar is that the weaker dollar will not have gone unopposed in emerging markets. The consequence of this is reserve rebalancing by Asian Central Banks. With USD/CNY, a key influence for the region, testing major lows, even bigger CB demand for EUR/USD is likely to evolve. EURUSD and USDCNY

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