FX Market Update 21-2

Market Briefs

• EUR/USD -0.16 %, USD/JPY 0.11%, GBP/USD -0.56%, EUR/GBP 0.41%
• DXY 0.19%, DAX -0.81%, FTSE -0.14 %, Brent -0.46%, Gold -0.08%
• EZ Markit Mfg Flash PMI Feb, 58.5, f’cast 59.3, prev 59.6
• EZ Markit Serv Flash PMI Feb, 56.7, f’cast 57.6, prev 58.0
• EZ Markit Comp Flash PMI Feb, 57.5, f’cast 58.5, prev 58.8
• DE Markit Mfg Flash PMI Feb, 60.3, f’cast 60.6, prev 61.1
• DE Markit Service Flash PMI Feb, 55.3, f’cast 57.0, prev 57.3
• DE Markit Comp Flash PMI Feb, 57.4, f’cast 58.5, prev 59.0
• GB ILO Unemployment Rate Dec, 4.4%, f’cast 4.3%, prev 4.3%
• GB Employment Change Dec, 88k, f’cast 173k, prev 102k
• GB Avg Wk Earnings 3M YY Dec, 2.5%, f’cast 2.5% prev 2.5%
• GB Avg Earnings (Ex-Bonus) Dec, 2.5%, f’cast 2.4%, prev 2.4%
• Hard Brexit faction in May’s party demands clean break from EU
• Euro, yield rise not unwarranted tightening: ECB’s Vasiliauskas
• It is not certain the next ECB chief will be Germany’s Weidmann – Italy minister
• Japan govt reiterates its view the economy is recovering ‘gradually’
• Oil falls as dollar rises, U.S. inventories expected to rise
• Gold steadies ahead of Fed minutes after steep slide

Looking Ahead – Economic Data (GMT)

• 12:00 US MBA Mortgage Applications (w/e) (prev -4.1%)
• 12:00 US Mortgage Market Index (w/e) (prev 399.4)
• 12:00 US MBA Purchase Index (w/e) (prev 240.4)
• 13:55 US Redbook YY (w/e) (prev 2.8%)
• 14:45 US Markit Comp Flash PMI (Feb) (prev 53.8)
• 14:45 US Markit Mfg PMI Flash (Feb) (mkt 55.4, prev 55.5)
• 14:45 US Markit Svcs PMI Flash (Feb) (mkt 54.0, prev 53.3)
• 15:00 US Existing Home Sales (Jan) (mkt 5.60 mln, prev 5.57 mln)
• 15:00 US Exist. Home Sales % Chg (Jan) (mkt 0.9%, prev -3.6%)

Looking Ahead – Events, Other Releases (GMT)

• 14:00 Fed’s Harker speaks on the economic outlook; St Louis, MO
• 14:45 FedTrade Operation 30-year Fannie Mae / Freddie Mac (max $1.015 bn)
• 16:30 Treasury auctions $15 bn 2-year floating rate notes
• 18:00 Treasury auctions $35 bn 5-year notes
• 19:00 FOMC Minutes (January 30-31 meeting)

Currency Summaries

EUR/USD

• EUR/USD trades a tight 1.2308-1.2339 range in Europe (Asia 1.2308-44)
• German Feb composite PMI 57.4 vs 58.5 f/c and prior 59.0
• EZ Feb composite PMI 57.5 vs 58.5 f/c and prior 58.8
• Limited FX reaction likely because PMIs remain at lofty levels
• Resistance at 21-DMA at 1.2381 and 200-HMA 1.2372
• Support @ Feb 13/14 lows 1.2285/75 support then Feb 9 low 1.2206

USD/JPY

• USD/JPY rise has been a boon for those pursuing sell-rally strategies
• FOMC risk due to amount of speakers and meeting minutes
• Talk of supply near 108.00 with stops above, recall 107.91 was Feb 14 peak
• Spot rose in Asia from 107.28 early on to hit 107.90 on short-covering
• Stops above 107.50 tripped on way up in Asia, MoF Asakawa comments helped

CHF

• Dollar bid holds into fourth consecutive session
• USD/CHF to 0.9384 high having cleared 0.9362 Fibo resistance Tues
• Next Fibo off the 0.9470-0.9188 drop comes at 0.9403, 76.4%
• 21DMA previous resistance now support at 0.9330
• EUR/CHF remains a spectator as dollar moves dominate FX
• Cross plays 1.1535-1.1560, little changed from Tuesday’s action

GBP

• Cable extended south to 1.3927 after unexpected UK ILO jobless rate rise
• 4.4% vs 4.3% forecast. 1.3927 = one-week low. 1.3949 was pre-data low
• Early Europe drop from 1.3996 to 1.3949 courtesy of Brexit concerns
• Hard Brexit faction in PM May’s party demands clean break from EU
• The hard Brexit faction comprises 62 of the Tories’ 316 MPs
• EUR/GBP up to 0.8845 after UK data. Employment +88k vs +173k f/c

USD/CAD

• USD/CAD ticked up to a new 12-day high of 1.2672 during the European am
• Offers expected near 1.27 if ascent extends: 1.2690 = 2018 high (Feb 9)

AUD/USD

• AUD/USD extended south to a new 1wk low of 0.7841 in early European trade
• 0.7847 was late Asia low. Drop to 0.7841 influenced by lower copper prices
• LME copper plumbed 1wk low of USD 7,035/tonne during European am

NZD/USD

• NZD/USD met headwind pre-0.7355 after firming from 0.7326
• 0.7326 = late Asia one-week low. 0.7355 was Asia high
• AUD/NZD extended south to a 6mth low of 1.0683 early Europe

FX OPTIONS

• Near term focus FED minutes. Overnight options asking more premium than usual
• GBP risk premium benefits from MPC speakers today and UK GDP data Thursday
• Huge GBP/USD 2.2bln 1.4000 vanilla option expiry Monday Feb 26
• USD/JPY falters pre 108.00, but 108.00 JPY put buyers cover for any potential break
• USD/JPY risk reversals see JPY call bias scaled back as downside risks recede for now

COMMENTS

Firmer USD helps cheapen Italy, German risk hedges

Those yet to hedge the March 4 event risks of Italian elections and the German SPD vote should not fret just yet, as the recent setback in EUR/USD spot presents opportunities to cover for deeper EUR/USD declines using cheaper reverse-knock-out options. Two-week expiry options rolled over the risk events from Monday and there was a notable spike in risk reversals – the premium for EUR puts (sell EUR) vs EUR calls (buy EUR). These premiums have increased amid the weight on EUR/USD from the firmer USD tone since, so buying outright EUR puts is now more expensive. However, those who think the downside is limited can take advantage of that downside premium by adding a knock-out trigger to a vanilla put which will significantly cheapen it. Two-week expiry 1.23 EUR puts cost 82 pips outright, but just 32 pips if adding a 1.20 knock-out trigger, or 1.22 EUR put with a 1.19 trigger for 23 pips (spot reference 1.2315). These options allow the holder to sell EUR/USD at the strike price, providing the trigger is still intact at expiry.

May’s Brexit speech a potential risk for sterling

Sterling is again on the backfoot and could take a fresh hit if UK PM May gives into pressure from some MPs within her Conservative party and takes a hard Brexit turn when she delivers her Brexit speech next week. Ahead of that speech and a slated meeting of May’s Brexit cabinet Thursday, 62 of the Tories’ 316 MPs have signed a letter of ‘hard Brexit’ demands to May, according to the BBC. The letters’ signatories include ardent Brexiteer Jacob Rees-Mogg, the bookies’ favourite to be the next Tory party leader. The number of signatories is significant, as it exceeds the 48 needed to set the wheels in motion for a leadership challenge to May. Recent reports said the number of leadership challenge letters lodged with the chairman of the Tory party’s backbench committee was already close to 48. The risk of a GBP-negative Tory leadership challenge will increase if the signatories of the Brexit letter deem May is going too ‘soft’ on Brexit.

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