FX Market Update 19-2

Market Briefs

• EUR/USD 0.05 %, USD/JPY 0.22%, GBP/USD -0.14%, EUR/GBP 0.1%
• DXY 0.06%, DAX 0.04%, FTSE -0.1 %, Brent 0.57%, Gold -0.01%
• EZ Current Account NSA,EUR Dec, 45.8 bln, f’cast 37.8 bln, prev 40.1 bln
• EZ Current Account SA, EUR Dec, 29.9 bln, f’cast 32.5 bln, prev 35.0 bln
• Gearing up for rate hike, UK households turn gloomier on finances – survey
• Japan exports grow, manufacturers mood sours as yen rise clouds outlook
• Merkel backs close ally for key party role amid succession debate
• Oil hits 2-week high on share market recovery, Middle East tensions
• Gold flat as equities recovery offsets inflation worries

Looking Ahead – Economic Data (GMT)

• There are no major economic data scheduled

Looking Ahead – Events, Other Releases (GMT)

• There are no major events scheduled

Currency Summaries

EUR/USD

• No major s/t trend to reverse in EUR/USD but Frid’s key day panning out
• EUR/USD plays 1.2388-1.2435 early Monday vs 1.2206 low last week
• 21 and 10DMAs provide initial support, 1.2376 and 1.2355
• Still see l/t trend higher: better buy levels to 1.2380-1.2340
• 50% Fibo 1.2206-1.2556 at 1.2371 and 61.8% at 1.2340
• There is talk of bids to 1.2350: E795 mln 1.24 opt expiries Tues
• Stocks recover, U.S. 10-yr yld peaked at 2.9440 Frid, 2.8490 Mon low

USD/JPY

• USD/JPY has traded 106.10-106.65 range
• Recovery provides traders with better lvls to sell, underlying bias bearish
• Nikkei 225 index has closed up 428.96 points up (1.97%) in Asia
• Nikkei futures 48-hour log correlation with USD/JPY are +0.54
• The two assets are registering hourly closes in the same direction
• Traders should watch the 48-hour correlation closely to see if it holds up

CHF

• USD/CHF extended Friday’s rebound to 0.9298 early Monday
• In-line with broader market dollar recovery: seen fragile
• Heading into NY and spot slips back to 0.9272 open
• EUR/CHF flat on the day at 1.1520 as USD moves dominate
• Swiss sight depos down for domestic banks but higher in total w/e Feb 16
• USD/CHF Chart: forex http://tmsnrt.rs/2EDIVZZ

GBP

• Cable elicited fresh support around 1.4000 during the European am
• 1.3995 = Monday low-to-date. 1.3997 was the pre-weekend low
• Resistance levels 1.4048 (Asia high) and 1.4073 (NY high Friday)
• IMM gross GBP positions were slashed by 29% in fortnight to Feb 13
• Net GBP long nearly halved to 14,940 contracts in week to Feb 13
• Haldane in Blackpool today. Carney speaks on leadership/values 1745GMT

USD/CAD

• USD/CAD traded modest 19 pip range of 1.2538-1.2557 during European am
• 1.2568 was early Asia high to follow 1.2567 pre-weekend high

AUD/USD

• AUD/USD respected its 0.7903-0.7935 Asia range during the European am
• 0.7950 and 0.80 (option barrier level) are resistance levels beyond 0.7935
• Huge 0.7950 option expiry Wednesday, AUD 3.26bln strike

NZD/USD

• NZD/USD revisited 0.7375 (pre-weekend low) during the European am
• 0.7377 was early Asia low, before rise to 0.7409 (intra-day high)
• Key resistance 0.7437 (Jan high, revisited Friday)

FX OPTIONS

• Respite for USD weakness leaves key risk levels in EUR and JPY left intact
• Big barriers USD/JPY 105.00-104.00 key to deeper losses, 1.2600-1.2700 EUR/USD
• Implied vols have eased in EUR and JPY as some profits booked, spot consolidates
• 2-week vols higher over Italy election, risk apparent but much less than French elections
• GBP vol setbacks limited for now as recent demand absorbed, vols perform well of late
• Huge 3.2bln AUD/USD expiry at 0.7950 Wednesday a potential draw

COMMENTS

Dollar recovery likely to be short-lived

The USD’s recovery on Monday is likely to be an adjustment within the longer-term bear trend as the negatively-aligned U.S. Treasury yield correlation continues to drag on the greenback. Rising U.S. bond yields usually prompt a pick-up in the dollar but this relationship has reversed of late. Chart watchers will point to a USD reversal signal Friday and early Monday DXY gains are encouraging, but the longer-term decline and the confused USD backdrop are still in play. The stock market recovery has slowed safety flows and yen and CHF are marginally weaker versus the USD today. Sterling has also hit Brexit speed bumps in the 1.41s and the EUR rally faded ahead of a much touted 1.2600 level last week. U.S. yields have eased after the 10-year benchmark peaked at 2.9940 Friday and is now around 2.8840. The breakdown in the traditional high yield high currency correlation is set to continue, possibly as investor yield expectations are dashed despite the frothy U.S. economy and higher inflation outlook. There are also fears the Fed will not be proactive enough in terms of curbing rising inflation. DXY Daily Chart

USD/JPY awaits Fed minutes, but spec positions key

USD/JPY has staged a minor recovery from recent 105.55 multi-month low, but this is merely corrective as the markets takes stock after the recent volatility spike. Fed minutes from the Jan 31 meeting to be released later this week have the potential to move markets, but this is unlikely as a hike at the March FOMC meeting is already priced in. Direction will most likely be determined by the underlying market positioning. According to IMM data for the week ending Feb 13 the number of yen short contracts rose from 112,876 to 115,509, meaning the overall yen short is still stubbornly large. This is the equivalent of a hefty speculative USD/JPY long cash position of 13.3 yards which exacerbates the downside risk due to associated vulnerable sell stops. While the IMM data was for the period that preceded Friday’s drop 105.55 which should have seen a shake out of some of the longs since Feb 13, our expectation is that the speculative long USD/JPY position remains sufficiently large to pose a problem to bulls.

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