FX Market Update 9-2

Market Briefs
• EUR/USD 0.07 %, USD/JPY 0.37%, GBP/USD -0.16%, EUR/GBP 0.23%
• DXY 0.11%, DAX -0.47%, FTSE -0.3%, Brent -0.73%, Gold -0.35%
• U.S. Congress votes to end brief government shutdown
• BoE’s Broadbent: a couple of rate hikes within a year shouldn’t be “great shock”
• GB Construction O/P Vol MM Dec, 1.6%, 0.0% f’cast, 0.4% prev
• GB Construction O/P Vol YY Dec, -0.2%, -1.4% f’cast, 0.4% prev
• GB Industrial Output MM Dec, -1.3%, -0.9% f’cast, 0.4% prev
• GB Industrial Output YY Dec, 0.0%, 0.3% f’cast, 2.5% prev
• GB Manufacturing Output MM Dec, 0.3%, 0.3% f’cast, 0.4% prev
• GB Manufacturing Output YY Dec, 1.4%, 1.2% f’cast, 3.5% prev
• GB Goods Trade Bal. Non-EU Dec, -5.18 bln, -4.10 bln f’cast, -4.68 prev
• GB Goods Trade Balance GBP Dec, -13.58 bln, -11.60 bln f’cast, -12.23 bln prev
• FR Industrial Output MM Dec, 0.5%, 0.1% f’cast, -0.5% prev
• Youth wing demands change in Merkel’s party after coalition concessions
• France, Germany call for joint G20 action on cryptocurrencies
• Oil slides towards steep weekly loss as supply fears mount
• Gold firm as equities drop; heads for second weekly loss

Looking Ahead – Economic Data (GMT) 
• N/A Atlanta Fed GDPNow Model Forecast for Real GDP growth (Q1) (prev +4.0% q/q AR)
• 13:30 CA Employment Change (Jan) (mkt 10.0k, prev 78.6k)
• 13:30 CA Unemployment Rate (Jan) (mkt 5.8%, prev 5.7%)
• 13:30 CA Full time employment chng (Jan) (prev 23.7k)
• 13:30 CA Part time employment chng (Jan) (prev 54.9k)
• 13:30 CA Participation Rate (Jan) (prev 65.80%)
• 15:00 US Wholesale Invt(y) R MM (Dec) (mkt 0.2%, prev 0.2%)
• 15:00 US Wholesale Sales MM (Dec) (mkt 0.6%, prev 1.5%)

Looking Ahead – Events, Other Releases (GMT) 
• 14:45 FedTrade operation 30-year Ginnie Mae (max $840 mn)
• 17:00 Bank of England Deputy Governor Cunliffe addresses derivatives conference; Dana Point, CA

Currency Summaries
EUR/USD
• EUR/USD confined to a tight 1.2250-87 range in Europe
• Quick rally after yesterday’s sell-off pierced Jan 19/22 lows @ 1.2214
• Rapid rebound reached 1.2295 but Asia and Europe only make 1.2287 today
• Data free session in U.S. and Europe leaves traders watching stocks
• E-mini up 0.4% in advance of the U.S. open but 10/30 yields also up 2/3bp
• EUR 2.3 billion expiries will add to the range bound feel ahead 15GMT cut

USD/JPY 
• USD/JPY, elevated as shorts gets squeezed, hits supply
• Spot hit new session high at 109.32 as those that sold in Asia were squeezed
• Japanese names seen as main buyers putting a squeeze on sellers
• Some non-Japanese names sold simultaneously sold Nikkei and yen in Asia
• Leveraged names sold USD/JPY earlier but and ran into big 108.50 bids
• Despite recovery attempts, technical outlook remains bearish
• EBS selling all week but USD/JPY spec long likely still big sell stops below

GBP 
• Cable has fallen by a cent from 1.3987 to threaten 1.3880
• Losses influenced by much higher than expected UK goods trade deficit
• GBP 13.576bln in Dec vs GBP 11.6bln f/c. 1.3987 was early Europe high
• 1.3880 was pullback low from Thursday’s 1.4067 high after hawkish BoE
• Broadbent says couple of hikes within a year shouldn’t be “great shock”
• EUR/GBP up half-a-penny from 0.8779 (European am low, pre-UK data)

USD/CAD
• USD/CAD has risen to threaten 1.2615 ahead of the North American open
• 1.2615 was Thursday’s 2018 high. 1.2615 is also the 100DA
• Canada jobs data due 1330GMT, employment f/c +10k, jobless rate f/c 5.8%

AUD/USD 
• AUD/USD gravitated to 0.7800 during the European am
• Huge 0.7800 option expiry for NY cut, AUD 2.75bln strike
• 0.7769 was European am low, 10 pips shy of Asia’s 6wk low
• Bids are tipped near 0.7755 (200DMA) and 0.7724 (Dec 27 low)

NZD/USD
• NZD/USD rose from 0.7205 to 0.7234 during the European am
• Parameters within Thursday’s NY afternoon range of 0.7193-0.7242
• AUD/NZD met headwind at 1.0800 after firming from 1.0766 (Asia low)

FX OPTIONS
• FX volatility levels stay high for now, dip buyers limit setbacks
• Realised/actual volatity has picked up to help justify current implied levels
• High beta pairs such as JPY and AUD stand out as key risk barometers
• Solid bid for JPY call and AUD put options. Huge 2.75bln AUD/USD 0.7800 expiry today
• 1-month EUR related vols underpinned since capturing March ECB Thursday.

COMMENTS
Sterling faces more volatility if UK heads to polls
Political pressure on UK PM May is raising the spectre of the next UK general election being held before Britain’s scheduled EU exit in March 2019, if she is toppled as Conservative party leader this year. Another general election within 13 months could significantly impact sterling as it is far from clear whether the Conservatives would win a majority at a crucial time when they are negotiating a post-Brexit deal with the EU. A win for the opposition Labour party might be no panacea for sterling as there are more questions than answers regarding Labour leader Corbyn’s Brexit views at present. Ladbrokes quotes slightly longer odds for Labour to win a majority at the next election than the Conservatives, 9/4 versus 2/1, with another hung parliament its 6/4 favourite. This reflects the tightness of the opinion polls: the latest YouGov survey said the Conservatives are backed by 43% of voters and Labour 39%. Ladbrokes quotes 4/1 for the next general election to be held this year and 9/4 that it is held in 2019.

Big or small equities drops suit EUR/USD bulls
One way or another stock market sell-offs will play into the hands of those bullish EUR/USD. EUR/USD traders have acted prudently to book some profits during a time of heightened uncertainty due to the stock market turmoil. this has seen a much needed EUR/USD correction of a very big rise but that’s healthy for the long-term uptrend. If stocks were to really sell off, fuelling risk aversion, the euro–which is backed by a huge currernt account surplus–should rally. Markets are not that risk averse and they do not need to be. Stock market moves have been eye-catching but measured against prior rises they remain modest. To put the DJI drop in perspective, the sell-off is still some way from meeting the minimum requirement for a technical correction of the rally since Donald Trump’s November 2016 election win which is 23,280. In percentage terms, neither of the two 1,000+ point drops this month would make the top 20 chart for the largest daily percentage losses.

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