FX Market Update 6-2

Market Briefs

• EUR/USD 0.29 %, USD/JPY -0.02%, GBP/USD 0.04%, EUR/GBP 0.24%
• DXY -0.06%, DAX -1.86%, FTSE -1.95%, Brent -0.67%, Gold 0.25%
• DE Industrial Orders MM Dec, 3.8%, 0.7%, -0.4% f’cast, -0.1% prev
• GB BRC Retail Sales YY Jan, 0.60%, 0.60% prev
• FR Budget Balance Dec, -67.80 bln, -84.70 bln prev
• Merkel ready for “painful compromises” with coalition deal in sight
• Court rejects legal bid to show Britain could stop Brexit
• BoE signs up to code aimed at keeping forex markets clean
• China central bank reaffirms prudent, neutral monetary policy in 2018
• Japan downplays fallout from market rout, BOJ rules out near-term rate hike
• Bitcoin slides below $6,000; half its value lost in 2018
• German wage deal should give some comfort to ECB
• Oil eases, but wards off stocks-style turbulence
• Gold barely rises since equity sell-off seen as blip

Looking Ahead – Economic Data (GMT)

• 13:30 US International Trade MM $ (Dec) (mkt -52.0 bln, prev -50.5 bln)
• 13:30 US Goods Trade Balance (R) (Dec) (prev -71.58 bln)
• 13:30 CA Trade Balance C$ (Dec), ( mkt -2.20 bln, prev -2.54 bln)
• 13:30 CA Exports C$ (Dec), (prev 46.21 bln)
• 13:30 CA Imports C$ (Dec), (prev 48.75 bln)
• 15:00 US JOLTS Job Openings (Dec) (mrkt 5.900 mln, prev 5.879 mln)
• 15:00 CA Ivey PMI (Jan) (prev 49.3 bln)
• 15:00 CA Ivey PMI SA (Jan) ( mkt 61.0, prev 60.4)

Looking Ahead – Events, Other Releases (GMT)

• 13:50 Fed’s Bullard gives presentation on the U.S. economy and monetary policy before the 29th Annual Gatton College of business and Economics Economic Outlook Conference – Lexington, Kentucky
• 15:00 Treasury Sec’y Mnuchin testifies before the House Financial Services Committee
• 16:30 Treasury auctions $15 bn 4-week bills ($10 bn decrease)
• 16:30 Treasury auctions $30 bn 70-day cash management bills
• 16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.310 bn)
• 18:00 Treasury auctions $26 bn 3-year notes ($2 bn increase)
• 20:00 Treasury STRIPS

Currency Summaries


• EUR/USD calm after some calm
• Pair trading sedately within slightly lower ranges, 1.2371-35 in Europe
• Stock reverses have led to some long liquidation
• Demand for UST safety has also weigh yields and works to prop EUR/USD
• 1.2351 low falls short 1.2335 Jan 30 trough seen after ECB on Jan 25
• Pre-NFP peak at 1.2523 fell shy of the 1.2538 high seen on ECB day
• Further consolidation within 1.23-1.25 looking likely
• Bull trend solid but further paring of existing positions is likely


• Nikkei rout gives USD/JPY traders sinking feeling, s-term bounce is a fade
• Nikkei index closes down 4.7%, the biggest percentage drop since Nov 2016
• Volatile trading means USD/JPY sees a wide 108.46-109.32 Tuesday range
• Bears eye stops layered under Jan 108.28 low, with more under 108.00


• EUR/CHF stages a decent rebound out of the 1.1509 Monday low
• SNB may have decided to take the sting out of a 2.75% CHF gain since Jan 15
• The central bank continues to view the CHF as over valued
• Today’s rebound to 1.1610 the largest pullback against the bear trend so far
• Will look to reserve and sight depo data for further clues on SNB involvement
• 100DMA 1.1627, Mon 1.1640 high and 1.1650 cloud base fighting SNB’s corner
• Stock slump a major factor and again have prompted SNB action


• Cable met headwind just shy of 1.40 after rallying off 1.3942
• 1.3942 was European am low. 1.3937 was two-week low in Asia
• Drop to 1.3937 came as Asia stocks tanked after US stock slump Monday
• Cable suffered biggest two-day fall since June 2017 FridayMonday, 2%
• EUR/GBP rose to a 20-day high of 0.8891 during the European am
• Greenback and euro higher up safe-haven currency ladder than GBP


• USD/CAD extended south from 1.2565 to 1.2505 during the European am
• 1.2565 was 26-day high in Asia as Asian equities tanked
• Canada Dec trade data due 1330GMT, trade deficit f/c CAD 2.2bln


• AUD/USD met headwind at 0.7888 after extending north from 0.7835
• 0.7835 was 27-day low in Asa as Asian equities tanked
• Offers tipped near 0.7900 (0.7899 was Asia high)
• Huge 0.7900 and 0.7800 option expiries Friday, AUD 2.2bln and 2.6bln strikes


• NZD/USD extended north from 0.7257 to 0.7319 during the European am
• 0.7257 was 19-day low in Asia as Asian equities tanked
• Monday’s high of 0.7330 is a resistance level


• Risk aversion drives FX volatility up this week, but Equity slide falters for now, vols peak
• EUR/USD still looking for longer term gains – size buyers 1-year EUR call strikes
• USD/JPY clearly concerned with downside – big spike in JPY call vol premiums
• GBP vols perform, but looking stretched now. Focus on MPC and inflation Thursday
• AUD/USD put bias sees huge spike this week, 1mth risk reversal high since May


S.Africa’s Zuma deadlock could reverse ZAR rally

A protracted deadlock within South Africa’s ruling ANC over President Zuma’s future could trigger fresh ZAR weakness and volatility in USD/ZAR especially as the dollar begins to show signs of recovery. The ZAR has risen so far this year against the dollar on investor optimism over the political outlook as pressure mounted within the ANC and opposition for scandal-plagued Zuma to quit before his term ends in 2019, and hand over to new ANC leader Cyril Ramaphosa. However, Zuma has so far withstood the pressure and the rand is now struggling against the USD and may lose ground as the political outlook remains unclear. With a near 20% rally behind it since mid-November, built pretty much on political optimism and carry, the rand is now open to an adjustment as a long ZAR market looks for actual good news as opposed to expectations. Much now hinges on today’s cabinet meeting called by Zuma and the timeline of the State of the Nation address due on Thursday but may be postponed. USD/ZAR Daily Chart:

USD/JPY’s fall not over as equities rout weighs

USD/JPY is at risk of deeper falls and an eventual test of the 2017 107.32 low, as the global stock market rout extends amid heightened yen-friendly risk aversion. The Nikkei index closed down 4.7% on Tuesday, the biggest percentage drop since November 2016, as it followed tumbling U.S. stocks. Despite USD/JPY’s intra-day recovery from Asia’s 108.46 low, the underlying trajectory is overwhelmingly negative. In the current environment which makes USD/JPY trading volatile, Japanese investors are unlikely to increase USD/JPY long positions. While IMM data showed that speculative yen short contracts fell from 122,870 to 114,696 in the week ending Jan 30, this is still the equivalent of a hefty USD/JPY long cash position of 13.2 yards, exacerbating the downside risk. Large sell stops are expected both below the January 108.28 low and the 108.00 psychological level which if triggered will tee up a deeper fall. Daily Bollinger


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