FX Market Update 26-2

Market Briefs

• EUR/USD 0.38%, USD/JPY -0.27%, GBP/USD 0.69%, EUR/GBP -0.28%
• DXY -0.36%, DAX 0.34%, FTSE 0.31%, Brent -0.22%, Gold 0.75%
• UK Finance Mortgage Apps Jan, 40.117k, prev 36.115k
• UK services businesses enjoy first profit rise in in 2 years-CBI
• China pushes back against criticism of plan for Xi to stay in power
• Corbyn piles pressure on May over Brexit as Labour pledges customs union
• Britain will not seek a post-Brexit customs union with EU – May’s spokesman
• Merkel’s CDU votes on German coalition deal after new cabinet picks
• Crypto ‘noobs’ learn to cope with wild swings in digital coins
• Kuroda dismisses call to look into why BOJ’s inflation target remains elusive
• Gold rebounds from biggest weekly loss this year as dollar slips
• Oil steady after hitting 3-week top; Saudis to keep output below cap

Looking Ahead – Economic Data (GMT)

• 13:00 US Build Permits R Numb MM (Jan) (Prev 1.300 mln)
• 13:00 US Build Permits R Chg MM (Jan) (prev -0.2%)
• 13:30 US National Activity Index (Jan) (prev 0.27)
• 15:00 US New Home Sales-Units (Jan) (mkt 0.645 mln, prev 0.625 mln)
• 15:00 US New Home Sales Chg MM (Jan) (mkt 3.2%, prev -9.3%)
• 15:30 US Dallas Fed Mfg Bus Idx (Feb) (prev 33.40)

Looking Ahead – Events, Other Releases (GMT)

• 13:00 Fed’s Bullard delivers keynote address at NABE policy conference; Washington, DC
• 16:00 Treasury announces 4-week bills (e: $55 bn)
• 16:30 Treasury auctions $51 bn 13-week and $45 bn 26-week bills
• 16:45 FedTrade Operation 30-year Ginnie Mae (max $710 mn)
• 20:15 Fed’s Quarles addresses NABE policy conference; Washington, DC

Currency Summaries

EUR/USD

• EUR/USD adds to Asia’s gains in the European session
• EUR/USD 1.2281-1.2319 in Asia reaches 1.2350 in Europe
• Pullback from recent highs for U.S. yields cited by some for EUR/USD rise
• However, from the perspective of interest rates EUR/USD should be lower
• 10-year U.S./German yield spread is close to its widest since end-2016
• EUR 800mln 1.2350 and EUR 1bln 1.2400 expiries likely to offer resistance
• U.S. new home sales data at 15GMT f/c up 3.2%

USD/JPY

• USD/JPY bias remains to the downside, Mon has seen a 106.38-107.29 range
• Sell-rally strategies still in play, offers heavy from the 107.30 level
• Japanese exporters likely to cap through to the end of month
• London has tried to force a recovery with only limited success to 106.68
• Skew remains on downside, fourteen-day momentum negative

CHF

• A degree of stability returns to USD/CHF albeit within a shallow down draft
• Spot plays 0.9327-0.9379 and downside contained by 10DMA a 0.9320
• Not writing off the recent bull run just yet and dip buying still favoured strategy
• A drop under the 0.9188 Feb 16 low negates short-term bull view
• EUR/CHF still very much a sidelined market with little direction
• Short-term techs suggest downside scope but a shallow bull bias on weeklies
• Latest Swiss sight depo data shows fall in domestic flow but increase in total deposits

GBP

• Cable rose to a 10-day high of 1.4070 during the European am
• Ascent influenced by hawkish steer from BoE’s Ramsden in Sunday Times
• Former dove Ramsden sees case to raise rates sooner than he thought
• Ramsden steer increases probablity of BoE rate hike in May
• GBP also supported by Labour support for UK to stay in EU customs union
• Move could lead to a Commons defeat for Tory PM May (in April or May)

USD/CAD

• USD/CAD all-but revisited 1.2614 (Friday’s low) in Asia
• 1.2662 was Asia high, before drop to threaten 1.2614 on USD selling
• Friday’s low was plumbed on higher than expected Canada inflation data
• Latest round of NAFTA talks got underway Sunday. Talks run until March 5

AUD/USD

• AUD/USD met headwind pre-0.79 after extending north early Europe
• Large 0.7900 option expiry for 10am ET NY cut, AUD 510mn strike
• Another even larger 0.7900 expiry Wednesday, AUD 980mn strike
• 0.7905 = Feb 21 high. 0.7860 (Feb 22 high) is now a support point

NZD/USD

• NZD/USD extended north to 0.7345 in early European trade
• 0.7278 was Asia low, before UST 10-year yield eased to 2.85%
• USD rose after UST 10-year yield rose to 4yr high of 2.95% Feb 21
• NBNZ survey and NZ Q4 trade data due this week (Wednesday)

FX OPTIONS

• Implied vols under further pressure amid improving risk sentiment
• Event risk helps limit deeper declines, but Italy election risk already being faded
• 1-week expiries capture Italy and German SPD votes, vols and EUR puts off early highs
• USD/JPY downside fears limited according to fading option vols and JPY call premiums
• Cable eyes PM May Brexit speech Friday to limit vol setbacks as gamma performs of late

COMMENT

USD/JPY offers opportunities for long-term buyers

USD/JPY has reached levels that should attract long-term buyers as widening U.S./Japan bond yield spreads prop up the pair. The modest retreat in U.S. 10-year yields over the last few days has encouraged USD/JPY sellers. But, except for the 30-year spread, U.S./Japan bond yield spreads are at their widest since 2007 when hugely popular carry trades blew up, sparking risk aversion and setting the scene for the global financial crisis. Judged by vols, stocks and interest rates, there is no need to fear a repeat. Rather, traders should be looking for opportunities to buy into carry trades and given the level of USD/JPY they should consider JPY funding. Stock markets have recouped most of the losses seen at the start of February, JPY vol has dropped towards 8.5 from 10+ but USD/JPY is still down close to 5% this month. The only real factor weighing is technicals, and a close over the 200-MMA at 105.72 this week is needed to encourage long-term demand. US/Japan yield spreads:

CHART OF THE DAY

GBP/USD outlook brighter as converges on 200-WMA

Technicals are painting a brighter picture for GBP/USD, with constructive dailies, weeklies and a climb to the 200-WMA at 1.4330 on the cards. Price action week ending Feb 23 delivered a hammer (bullish) signal but needs a positive close this Friday to confirm. GBP/USD is tracking higher and supported by a weekly trend line off the late December lows, currently 1.3929, and this in turn is running just ahead of the 10-DMA at 1.3902. The weekly slow stochastic is poised to cross bull side and confirm the latest price pick-up. The daily chart has nudged above the kijun line at 1.4055 and there’s a marked pick-up in 14-day momentum. Converged 10, 21 and 30-DMAs are aligning bullishly and a close above the averages and the daily kijun line would open up the Feb 16 1.4145 high. Looking for stronger confirmation from a Tenken-kijun bull cross but faster line is currently below 1.40 at 1.3973. However, note that the price is above both these Ichimoku lines, indicating a bullish bias

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