FX Market Update 7-2

 Market Briefs

• EUR/USD -0.25 %, USD/JPY -0.42%, GBP/USD -0.47%, EUR/GBP 0.25%
• DXY 0.28%, DAX 0.49%, FTSE 0.66%, Brent -0.24%, Gold 0.18%
• Merkel’s conservatives make big concessions to SPD in coalition deal
• Peripheral bond yields drop as SPD touted for German finance ministry
• DE Industrial Output MM Dec, -0.6%, -0.5% f’cast, 3.4% prev
• GB Halifax House Prices MM Jan, -0.6%, 0.2% f’cast, -0.6% prev
• GB Halifax HousePrice 3M/YY Jan, 2.2%, 2.4% f’cast, 2.7% prev
• FR Current Account Dec, -0.9 bln, -3.3 prev
• FR Trade Balance, EUR, SA Dec, -3.47 bln, -4.90 bln f’cast, -5.69 bln prev
• IT Retail Sales NSA YY Dec, -0.10%, 1.40% prev
• China Jan FX reserves rise for 12th month as yuan rallies
• Fed’s Kaplan says market correction healthy, sees no economic impact
• British banks running out of time to apply for EU licence: ECB
• Oil steadies, as lower inventories offset by higher U.S. output
• Gold up off 3-week lows as investors hold cautious dollar view

Looking Ahead – Economic Data (GMT)

• 12:00 US Mortgage Market Index (w/e) (prev 413.4)
• 12:00 US MBA 30-Yr Mortgage Rate (w/e) (prev 4.41%)
• 13:30 CA Building Permits MM (Dec) (mkt 2.0%, prev -7.7%)
• 20:00 US Consumer Credit (Dec) (mkt 20.00 bln, prev 27.95bln)

Looking Ahead – Events, Other Releases (GMT)

• 13:30 Fed’s Dudley participates in panel on improving the banking culture, New York
• 16:15 Fed’s Evans discusses the economy and monetary policy; Des Moines, IA
• 18:00 Treasury auctions $24 bn 10-year notes (a $1 bn increase)
• 19:30 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $435 mn)
• 22:20 Fed’s Williams (voter, centrist) discusses the economy; Honolulu, HI

Currency Summaries

EUR/USD

• German industrial output drops 0.6% in December vs -0.5% f/c
• Merkel’s conservatives make big concessions to SPD in coalition deal
• EUR/USD slides despite apparent good political news
• EUR/USD opens 1.2391 in Europe and trades a 1.2339-1.2406 range
• Pair hitting lows ahead entry of U.S. traders
• Key short-term support @ 1.2300 38.2% retrace Jan rise and 21-DMA 1.2305

USD/JPY

• USD/JPY consolidates low 109’s, bids still lined up toward mid 108’s
• Tech support zone 108.50-28 – daily lows late Jan-early Feb, held since Sept
• Equities left key support levels intact, recovery since, helps prop USDJPY
• Break below 200DMA Emini and Nikkei likely catalyst for future USD/JPY drop
• Resistance Asia’s 109.72 recovery high, falling 21 DMA 110.03, Mon 110.29 hi
• Option expiries today 109.25-40 (573mln), 109.50-60 (863mln)

CHF

• EUR/CHF keeping to a tighter range Wed after big Mon-Tues swings: 1.1571-1.1607
• Improved risk sentiment keeping a bid in the cross but mkt unable to better Tues 1.1628 high
• Swiss Jan reserves fell and this fits with the firmer CHF seen through Jan
• February’s reserve numbers may well indicate some SNB action as 1.15 supp. held strong
• EUR/CHF constructive but gains seen limited to recent highs around 1.1640
• USD/CHF maintains two-day rally with 0.9403 high early Europe
• Calmer stocks and better dollar keeping the CHF on the back foot

GBP

• Cable fell by over a cent to test 1.3875 during the European am
• 1.3875 = 76.4% of 1.3838 (Tuesday’s low) to 1.3993 (early Europe high)
• Offers ahead of 1.40 also capped GBP Tuesday (before drop to 1.3838)
• Brexit uncertainty is helping weigh on the pound
• EUR/GBP rose to threaten 0.8900 during the European am
• 0.8910 was Tuesday’s 3wk high. 0.8927 = 2018 high (Jan 12)

USD/CAD

• USD/CAD rose from 1.2499 to 1.2528 during the European am
• Ascent influenced by risk of a down-day for US equities
• S&P E-mini -1% at 6.15am ET (S&P 500 closed up 1.74% Tuesday)

AUD/USD

• AUD/USD down to 0.7854 intra-day low ahead of the North American open
• Greenback benefitting from risk of down-day for US equities
• S&P E-mini -1% at 6am ET. 0.7900-10 offers kept lid on AUD/USD in Asia
• Huge 0.7900 option expiry Friday, AUD 2.4bln strike. Lowe speaks Thursday

NZD/USD

• NZD/USD elicited fresh support ahead of 0.7300 during the European am
• 0.7305 was Asia low to follow 0.7352 high after strong NZ jobs data
• RBNZ OCR verdict/MPS 3pm ET, RBNZ view on recent NZD gains awaited
• NZD/USD tested 0.7435 (Sept high) a fortnight ago (Jan 24)

FX OPTIONS

• FX Implied vols ease as calm returns to equity and broader markets
• EUR/USD remains heavy but not pricing much risk of range break-out near term
• JPY call strikes still demanding decent premium – USD/JPY downside risk still apparent
• GBP vols setbacks limited pre MPC and Inflation, Thursday vol break-even 125 pips
• No change forecast from RBNZ, but overnight vol premium is double the normal at 60 pips

COMMENT

Sterling bulls beware the Ides of March

March could bring more pain for sterling bulls as the risk of a Conservative challenge to UK PM May seems to be growing with the chairman of the Tory party’s backbench committee close to receiving enough letters from MPs to trigger a leadership election. Recent reports say the number of letters lodged with Graham Brady is close to the required 48–which would set the wheels in motion for a challenge to May. The aftermath of the May 3 local elections has been mooted as a possible trigger for a leadership challenge, but it may be as early as next month amid mounting Brexit concerns before May’s Brexit-related meetings with senior cabinet ministers Wednesday and Thursday. If May is unable to ease party angst during the looming UK parliamentary recess (Feb 9-19), it could prompt some frustrated Tory MPs to write those letters to Brady before a meeting of EU leaders next month. The European Council meeting starts March 22, a week after the Ides of March

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