FX Market Update 27-2

Market Briefs

• EUR/USD 0.08%, USD/JPY 0.09%, GBP/USD 0.01%, EUR/GBP 0.09%
• DXY -0.04%, DAX -0.2%, FTSE 0%, Brent -0.15%, Gold -0.04%
• EZ Business Climate Feb, 1.48, f’cast 1.47, prev 1.54
• EZ Economic Sentiment Feb, 114.1, f’cast 114.0, prev 114.7
• EZ Industrial Sentiment Feb, 8.0, f’cast 8.0, prev 8.8
• EZ Services Sentiment Feb, 17.5, f’cast 16.3, prev 16.7
• EZ Consumer Confid. Final Feb, 0.1, f’cast 0.1, prev 1.4
• EZ Services Sentiment Feb, 17.5, f’cast 16.3, prev 16.7
• EZ Consumer Confid. Final Feb, 0.1, f’cast 0.1, prev 1.4
• German inflation slows in February, regional data suggests
• ECB should gradually reduce stimulus: Weidmann
• Maintaining EU customs union a “sellout” for Britain, trade minister says
• Bank of England will not “go soft” on EU insurance rules
• BoE’s Woods says avoiding Brexit chaos a “top priority”
• Scotland says won’t consent to Brexit bill after latest UK offer
• Gold holds ground ahead of testimony by Fed’s Powell
• Oil eases as possible rise in US stocks outweighs faith in OPEC

Looking Ahead – Economic Data (GMT)

• 13:30 US Durable Goods (Jan) (mkt -2.0%, prev 2.8%)
• 13:30 US Durables Ex-Transport (Jan) (mkt 0.4%, prev 0.7%)
• 13:30 US Nondefe Cap Ex-Air (Jan) (mkt 0.5%, prev -0.6%)
• 13:30 US Adv Goods Trade Balance (Jan) (prev -72.26 bln)
• 13:30 US Wholesale Inventories Adv (Jan) (prev 0.4%)
• 13:30 US Retail Inventories Advance (Jan) (prev 0.6%)
• 14:00 US Monthly Home Price YY (Dec) (prev 6.5%)
• 15:00 US Consumer Confidence (Feb) (mkt 126.6, prev 125.4)
• 15:00 US Rich Fed Comp. Index (Feb) (prev 14)
• 16:00 CA Budget Balance, C$ (Dec) (prev -2.84 bln)
• 16:00 CA Budget, Year-To-Date, C$ (Dec) (prev -9.12 bln)

Looking Ahead – Events, Other Releases (GMT)

• n/a Fannie Mae has Benchmark note issuance slot
• 15:00 Fed’s Powell delivers semiannual monetary policy report to House Financial Services Committee
• 15:15 Former Fed Chairs Yellen and Bernanke discuss the current state of the economy and its challenges
• 16:30 Treasury auctions $60 bn 4-week bills (increased $5 bn) and $22 bn 52-week bills (size increased $2 bn)
• 16:45 FedTrade Operation 30-year Fannie Mae / Freddie Mac (max $1.015 bn)
• 19:00 Discount Rate Meeting Minutes

Currency Summaries

EUR/USD

• EUR/USD static ahead Fed Gov Powell’s first testimony at 15.00GMT
• Europe’s range just 1.2321-46 today, and 1.2278-1.2355 this week
• Lull in proceedings ups influence of EUR 1bln option expiries at 1.2350
• Data mixed. EZ M3 unchanged at 4.6% in Jan, compares ECB’s 4.5% ref
• Euro zone business climate sinks to 1.48 from 1.54 (f/c 1.47)
• German state CPI’s dip on a yy basis. German CPI at 13GMT f/c 1.5% from 1.6%

USD/JPY

• Bulls could be building for a retest of a big upside 108.02 Fibo
• Room for Jay Powell’s testimony to surprise markets
• Spot edged to a marginal new high Tues in London on light trading volume
• London high has been 107.11, one pip above the 107.10 Asia peak, 106.78 low
• Japanese exporters has said to have capped USD/JPY in Asia

CHF

• USD/CHF lapsing into a sideways stupor and watching broad USD trend
• Plays 0.9360-0.9388 through early Europe with offers touted to 0.9400-10
• Feb 22 0.9327-0.9409 range provides the initial kickers on larger moves
• EUR/CHF probing recent 1.1560 range high but seen contained
• Sideways bias holding while Dollar plays dominate

GBP

• Cable rose to threaten 1.40 in early European trade on the back of M&A news
• Comcast offers 22.1 billion pounds cash for Sky, GBP 12.50 per share
• Significantly higher than the GBP 10.75 per share agreed by Fox in Dec 2016
• Large 1.40 option expiries today and tomorrow, GBP 1.5bln strikes (total)
• 1.3945 = intra-day low since 1.40 threatened. 1.3929 was Monday’s low
• EUR/GBP rose to test 0.8838 (last Friday’s high) during the European am

USD/CAD

• USD/CAD rose to threaten 1.27 during the European morning
• 1.2668 was Asia low. 1.2712 was Monday’s high
• Fed chairman Powell’s monetary policy testimony at 1500GMT

AUD/USD

• AUD/USD traded narrow 18 pip range during European am, 0.7837-0.7855
• 0.7826-0.7893 was Monday’s range (high before the low)
• Fed chairman Powell’s monetary policy testimony at 1500GMT

NZD/USD

• NZD/USD threatened 0.73 during the European am after firming from 0.7274
• 0.7274 was Asia low. 0.7271 was last Friday’s nine-day low
• Fed chairman Powell’s monetary policy testimony at 1500GMT

FX OPTIONS

• Near term focus Powell testimony but event premiums suggest limited volatility
• Italy election risk premiums remain pressured, tame event premium there
• Size buyer EUR/USD 15 March 1.2500 EUR calls, looking for higher EUR near term
• USD/JPY downside risk seen limited as JPY calls and vols extend recent losses
• GBP vols still being bought on dips, certainly this side of PM May speech Friday

COMMENT

Powell’s neutral line may be a hawkish surprise

The new Fed Governor only has to agree with the consensus opinion of the FOMC to appear hawkish compared to current market expectations. The view that the new Fed Gov will tread a neutral path has evolved close to his first testimony at 15.00GMT. Yet the outlook that will appear neutral to the new Fed Governor, to align with the current FOMC consensus for three hikes this year, is more tightening than is priced in by financial markets. The difference maybe small with Fed funds pricing 64bp of tightening but traders are widely short of dollars and long carry trades believing rates stay low. Yet, a Republican Governor might also see a greater positive impact from the administration’s economic politics than markets that are seeing danger in the ballooning deficit. With the perceived terminal rate for the Fed eyed very low already, as little as 2.5%, the chance of a hawk

CHART OF THE DAY

EUR/JPY building a case for a bull run

The daily chart is throwing up bull reversal pointers and a fairly optimistic target. Consecutive false breaks of the 200DMA, a hammer candle Friday and bullish engulfing line confirmation Monday set the stage for a rebound against the Feb 2-23 bear trend. Bearish 14-day momentum beginning to fade and slow stochastic crossing to the topside add to the reversal call. Daily Ichimoku provides both a bull target and bearish alignment of cloud, kijun and tenken lines. A cloud twist at 134.75 out to March 16 a target. However, need to clear the tenken and 10DMA lines, today at 132.10 and 132.19 respectively. A bear cross on the slower 21 and 100DMAs also dampening down reversal potential. On the weeklies the potential for a bullish engulfing line. Close proximity to the 200DMA, 131.22, would provide a natural and not too costly stop on an at market rebound play but would not be too greedy. Feb 21 133.05 high or the converged 21-100 DMA lines at 133.55 possible but the cloud twist likely a level too far

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