FX Market Update 22-2

Market Briefs
• EUR/USD 0.06 %, USD/JPY -0.39%, GBP/USD -0.22%, EUR/GBP 0.25%
• DXY 0.05%, DAX -0.68%, FTSE -0.91 %, Brent -0.31%, Gold -0.04%
• GB GDP 2nd Release QQ Q4, 0.4%, f’cast 0.5%, prev 0.5%
• GB GDP 2nd Release YY Q4, 1.4%, f’cast 1.5%, prev 1.5%
• GB Business Invest QQ Prelim Q4, 0.0%, f’cast 0.5%, prev 0.5%
• GB Business Invest YY Prelim Q4, 2.1%, f’cast 2.4%, prev 1.7%
• GB CBI Distributive Trades Feb, 8, f’cast 13, prev 12
• DE Ifo Business Climate Feb, 115.4, f’cast 117.0, prev 117.6
• DE Ifo Current Conditions Feb, 126.3, f’cast 127.0, prev 127.7
• DE Ifo Expectations Feb, 105.4, f’cast 107.9, prev 108.4
• Fed policymakers show rising confidence on inflation, economic outlook -minutes
• Oil falls as stronger dollar eclipses U.S. inventory drop
• Gold dips on higher prospect of rising U.S. interest rates

Looking Ahead – Economic Data (GMT) 
• 13:30 US Initial Jobless Claims (w/e) (mkt 230k, prev 230k)
• 13:30 US Jobless Claims 4-Wk Avg (w/e) (prev 228.50k)
• 13:30 US Continued Jobless Claims (w/e) (mkt 1.930 mln, prev 1.942 mln)
• 13:30 CA Retail Sales MM (Dec) (mkt 0.2%, prev 0.2%)
• 13:30 CA Retail Sales Ex-Autos MM (Dec) (mkt 0.3%, prev 1.6%)
• 15:00 US Leading Index Chg MM (Jan) (mkt 0.7%, prev 0.6%)

Looking Ahead – Events, Other Releases (GMT) 
• 15:00 Fed’s Dudley briefs media on Puerto Rico and U.S. Virgin Islands
• 16:00 Treasury announces 13-, 26-, and 52-week bills (e: $51/45/20 bn)
• 17:10 Fed’s Bostic speaks before 2018 Banking Outlook Conference; Atlanta, GA
• 18:00 Treasury auctions $29 bn 7-year notes
• 19:30 FedTrade Operation 15-year Fannie Mae / Freddie Mac (max $315 mn)
• 20:30 Fed’s Kaplan speak on trade and the economy; Vancouver, British Columbia

Currency Summaries
• EUR/USD 1.2260-99 in Europe after 1.2260-86 in Asia
• Lower ranges follow U.S. rate rises following minute of Jan FOMC
• Feb IFO 115.4 vs 117 f/c and prior 117.6 follows softer ZEW and PMIs
• Weaker data but euro uptick suggests IFO dip seen as froth off the top
• EUR 1.2bln expiries 1.2340-50 and 21-DMA 1.2373 weigh
• Feb 9 low at 1.2206 underpins. 38.2% retr Nov-Feb rise 1.2173

• Dollar was boosted by Fed minutes, but not so much vs yen
• There has been sustained selling of USD/JPY in Tokyo and London this session
• Failed to crack 108 Wed as Japanese exporters, asset managers offers capped
• 108.02 — 50% retrace of the 110.48 to 105.55 Feb fall — caps
• Scope is for a breakdown through 107, stops said to be clustered below
• USD/JPY’s range has been 107.16-107.78 so far today

• USD/CHF finally runs into offers: ahead of tech resistance at 0.9420
• Fed minutes provided a brief lift in the Dollar and a volatile run into the close
• Inflation concerns and upbeat growth outlook but little fresh substance
• Spot updraft from 0.9188 Feb 16 low stalling and risk of a bearish signal Thurs
• On the pullback 0.9357 minor Fibo, 0.9335-40 10/21DMAs
• EUR/CHF continues to watch USD moves: cross locked in 1.15-1.1585 range

• Cable fell to 1.3869 early Europe, before rallying to 1.3915 pre-UK GDP data
• Drop to 1.3869 influenced by proximity of US 10yr UST yield to 3%
• Cable all-but revisited 1.3869 after UK Q4 GDP downwardly revised to 1.4%
• 1.5% was f/c. EUR/GBP threatened 0.8856 (Weds high) after UK GDP data
• UK PM May’s Brexit Cabinet meeting at Chequers today
• Politico-Opposition leader Corbyn to give Brexit speech on Monday (Feb 26)

• USD/CAD retreated to 1.2677 from an early Europe 8wk high of 1.2714
• 1.2706 was the Asia high (1.2706 = 200-day moving average)
• USD is eliciting support from higher UST yields (post-FOMC minutes)

• AUD pushed recovery envelope from 0.7790 to 0.7824 during European am
• 0.7824 = 38.2% of 0.7880 (post-FOMC minutes high) to 0.7790 (8-day low)
• Asia low was plumbed amid risk aversion: Nikkei closed down 1.07%

• NZD/USD extended north from 0.7307 to 0.7338 during the European am
• 0.7338 = 2 pips beyond 38.2% of 0.7383 (post-Fed minutes high) to 0.7307
• 0.7307 was eight-day low in Asia, courtesy of risk aversion

• Vols lower since FED as spot markets cling to ranges to sap interest for longs
• Event risk should limit setbacks, 2wk gets Italy vote, German SPD ballot, ECB
• 1-month expiry now captures March FED, BoE and EU summit
• Mild risk aversion saw short dated JPY vols up in Asia but JPY call bias stays low
• Falling expectations of any USD/JPY return to mid 105’s near term

EUR/USD pause offers opportunity to buy EUR/JPY
The EUR/USD uptrend is alive and well but the pause in the rally may have a sting in the tail for bulls as the costs of sitting long are painful and rising. On the other hand, the rewards for sitting long EUR/JPY are growing so for those bullish about the euro it’s a good time to consider switching. The costs of EUR/USD longs are high at about 22 pips per month and 107 pips to hold that position for four months. EUR/USD has been trading sideways for a month and in the meantime benchmark U.S./German bond yields have hit their widest level since December 2016, further weighing on the pair. EUR/JPY meanwhile, is trading slightly below its December 2017 level, so is cheap in comparison to an elevated EUR/USD, and the cost for sitting long is negligible at 8 pips for four months. Bonds underlying EUR/JPY investment intentions have moved significantly in favour of those long with the German/Japan 10-year bond yield spread doubling to 65bps since December.

Euro risks abound: Italy vote, ECB and March FOMC
EUR/USD faces plenty of event risk in the form of Italy elections, Germany’s SPD coalition ballot that may determine Chancellor Merkel’s future, ECB and Fed March meetings, boosting EUR/USD option activity. The March 4 Italian election risk has been the main driver of EUR/USD options this week, with the German SPD ballot also due that day. Two-week expiries rolled over March 4 on Monday and related vols and especially downside options saw a notable jump in premiums. The downside premium is still clearly apparent with March 5 25 delta risk reversals (EUR puts over EUR calls) trading 1.7 today beside good demand for March 5 1.2100 EUR puts outright. Two-week expiry captures ECB now and extends gains to 10.0 or 196 pips break-even for the straddles this morning. One-month expiry now captures the March FOMC and should help to limit setbacks there over coming sessions. A 25bps hike is now fully priced but dealers will be looking to see if there are any changes to the dot plots, given the more hawkish minutes from the January meeting.


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