Fx Market Update 8-2

Market Briefs

• EUR/USD -0.24 %, USD/JPY 0.32%, GBP/USD 0.08%, EUR/GBP -0.35%
• DXY 0.27%, DAX -1.14%, FTSE -0.81%, Brent -0.61%, Gold -0.58%
• DE Trade Balance, EUR, SA Dec, 21.4 bln, 21.7 f’cast, 22.3 bln prev
• DE Exports MM SA Dec, 0.30%, -1.00% f’cast, 4.10% prev
• DE Imports MM SA Dec, 1.4%, -0.5% f’cast, 2.3% prev
• GB RICS Housing Survey Jan, 8, 5 f’cast, 8 prev
• Fed likely to continue raising rates – Kaplan
• Bank of England to send new rates message in last year before Brexit
• Merkel under fire from own ranks over German coalition deal
• German coalition clears path for convergence on euro zone – France’s Le Maire
• U.S. congressional leaders forge budget deal that adds to deficit
• BOJ’s Suzuki signals chance of future rate hike, slower ETF buying
• Oil slides as U.S. output soars and North Sea crude flows restart
• Gold hits 4-wk low on firmer dollar amid U.S. rate hike views

Looking Ahead – Economic Data (GMT)

• 13:15 CA House Starts, Annualized, (Jan) (mkt 210.0k, prev217.0k)
• 13:30 CA New Housing Price Index, (Dec) (mkt 0.1%, prev 0.1%)
• 13:30 US Initial Jobless Claims, (w/e) (mkt 232k, prev 230k)
• 13:30 US Continued Jobless Claims, (w/e) (mkt 1.945 mln, prev 1.953 mln)
• 13:30 US Jobless Claims 4-Wk Avg, (w/e) (prev 234.50k)

Looking Ahead – Events, Other Releases (GMT)

• N/A Continuing resolution funding the U.S. government expires
• N/A FHLB prices new 2-year Global bond
• 13:00 Feb’s Harker on the economy and higher education; New York, NY
• 14:00 Feb’s Kashkari participates in moderated Q&A session; Pierre, SD
• 16:00 Senate Banking Committee to consider nomination of Marvin Goodfriend to be Fed Governor
• 16:00 Treasury announces 13- and 26-week bills (e: $48/42 bn)
• 16:00 Treasury announces 30-year TIPS (e: $7 bn)
• 16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.310 bn)
• 18:00 Treasury auctions $16 bn 30-year bonds (a $1 bn increase)

Currency Summaries

EUR/USD

• EUR/USD lower in Europe as post-stock slide fuels more profit-taking
• Europe opened 1.2275 and initially traded higher reaching 1.2295
• Pair topped short of 21-DMA, now 1.2315, the tech break point yesterday
• Failure ahead today prompts tech account to short EUR/USD to 1.2225 low
• Exceeding 50% retrace Jan’s rise @ 1.2227 targets 61.8% @ 1.2153 next
• Today EUR 800mln 1.2200 expiries may drawn the attention of a bearish market

USD/JPY

• USD/JPY bulls treading water, could sink despite Kuroda
• A USD/JPY bear resumption will likely tgt 109.00 where bids said to reside
• Upside limited despite BOJ Kuroda reiterating time not right to exit easing
• BoJ Suzuki: Powerful easing needed, some distance to inflation target
• Spot has traded above 109.73 pivot point, but cannot sustain breaks
• Range this session has been 109.12-109.78 so far
• Japanese bond dump to undermine USD/JPY support
• Must weigh pros-cons of policy though, easing hitting bank profits
• MoF flows week-ended Feb 3 – Japanese buy net Y466.5 bln foreign stocks
• Sell Y866.6bln bonds, foreigners sell Y126.7bln JPN stocks, Y353.1bln bills
• MoF Jan flow data – Japanese buy net Y1.2637 trln foreign stocks
• Net Y1.3887 trln bonds bought too, Y160.0 bln bills sold
• Foreigners buy Y668.2bln Japan stocks, sell Y984bln JGBs, Y1.1774trln bills
• Dec current account surplus T797.2 bln, Y1.0175 trln eyed
• End-Jan bank loans +2.4% y/y, Y523.068 trln outstanding, steady rise

CHF

• CHF/JPY the dominant Swiss pairing this week as de-risking took hold
• Losing 2.5% from the 118.55 Feb 2 peak: steadies early Thurs but still vulnerable
• Yen cross plays 115.77-116.27 and mid-range into New York
• EUR/CHF continues pretty much sideways within the Feb 5 range, 1.1509-1.1640
• USD/CHF extends its recovery to 0.9470, just shy of the 21DMA line at 0.9482
• 38.2% Fibo off the 0.9845-0.9257 drop also comes at 0.9482, 50% = 0.9551
• European stocks easier and injecting some pep into the CHF but spot remains bid

GBP

• Cable tested 1.3849 after sliding from 1.3915 (early Europe high)
• 1.3849 was Wednesday’s low. 1.3838 was Tuesday’s 18-day low
• Additional support 1.3800, level approximates to 61.8% of 1.3458-1.4346
• BoE event risk 12GMT: Saunders biggest risk to 9-0 rate vote consensus f/c
• QIR and Carney CPI letter due alongside MPA and MPC minutes
• Carney press briefing starts 1230GMT (usually lasts about an hour)

USD/CAD

• USD/CAD rose to a 2018 high 2 pips shy of 1.2600 during the European am
• 1.2598 is the 55-day moving average. 1.2549 was Asia low.
• BoC Senior Deputy Governor Wilkins due to speak at 1800GMT

AUD/USD

• AUD/USD eased to threaten 0.7800 again on relatively dovish Lowe
• Lowe says RBA does not see “strong case” for rate hike (at 0900GMT)
• Bids just shy of 0.7800 based AUD/USD at five-week low in Asia
• Huge 0.7800 option expiry Friday, AUD 2.6bln strike. 0.7797 = 55DMA
• 0.7795 = 2018 low (Jan 2). 0.7843 was European am high (pre-Lowe)

NZD/USD

• NZD/USD met headwind at 0.7217 after rallying off 0.7176
• 0.7176 = early Europe 1mth low as continent digested dovish RBNZ
• AUD/NZD scaled one-week peak of 1.0890 in early European trade
• Cross plumbed six-month low of 1.0747 earlier this week

FX OPTIONS

• Implied vol setbacks limited after Tuesdays gains, risk still present
• 1-month expiry rolls over ECB to support related EUR vols today
• GBP market focus on MPC and inflation report, next day vol break-even 120 pips
• JPY calls bias holds firm on risk reversals, highlights ongoing downside fears
• Huge gains for USD/CNH vols and CNH puts in Asia, short gamma fuels spot spike

COMMENTS

USD/CNH could see further volatility into new year

USD/CNH markets should brace for further volatility, especially as liquidity thins going into the Chinese New Year at the end of next week. Pricing in USD/CNH options shows the market was ill prepared for today’s sudden spike in spot, forcing it to reprice sharply higher. Short gamma probably helped fuel the spike, suggesting more volatile moves ahead. Hedging short topside gamma (lack of existing option coverage above mid-6.30s), would have forced option dealers to buy spot alongside shorter-dated vols. Huge gains in USD/CNH vols and the CNH put bias on risk reversals reinforces this view – the benchmark 1-month expiry implied vol contract went from 6.5 to 8.0 very quickly, a new high since Jan 2017, although it has slipped back to the low 7s for now as CNH settles. One-month vol started the year around 4.0 for context. One-month expiry 25-delta risk reversals (implied vol premium for CNH puts vs CNH calls) spiked a huge 1.0 vol to 1.4 CNH puts – its highest level since November 2016 and biggest one-day spike since August 2015 devaluation. 1mth USD/CNH risk reversals.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s