FX Market Update 5-3

Market Briefs

• EUR/USD -0.06%, USD/JPY -0.13%, GBP/USD 0.12%, EUR/GBP -0.16%
• DXY 0.06%, DAX 0.9%, FTSE 0.41%, Brent 0.42%, Gold 0.28%
• Italy faces political gridlock after 5-Star surges
• EZ Markit Serv Final PMI Feb, 56.2, f’cast 56.7, prev 56.7
• EZ Markit Comp Final PMI Feb, 57.1, f’cast 57.5, prev 57.5
• EZ Sentix Index Mar, 24.0, f’cast 31.0, prev 31.9
• EZ Retail Sales MM Jan, -0.1%, f’cast 0.3%, prev -1.1%
• EZ Retail Sales YY Jan, 2.3%, f’cast 2.1%, prev 1.9%
• DE Markit Services PMI Feb, 55.3, f’cast 55.3, prev 55.3
• DE Markit Comp Final PMI Feb, 57.6, f’cast 57.4, prev 57.4
• GB Markit/CIPS Serv PMI Feb, 54.5, f’cast 53.3, prev 53.0
• Merkel welcomes SPD vote, says new German govt must start work quickly
• China keeps growth target at 6.5 pct, stays focused on financial risks
• BOJ deputy governor nominee warns against premature exit from easy policy
• Oil prices capped at $65 as U.S. shale output gathers pace
• Gold gains amid concerns over trade war, Italy elections

Looking Ahead – Economic Data (GMT)

• 14:45 US Markit Comp Final PMI (Feb) (prev 55.9)
• 14:45 US Markit Svcs PMI Final (Feb) (prev 55.9)
• 15:00 US ISM N-Mfg PMI (Feb) (mkt 59.0, prev 59.9)
• 15:00 US ISM N-Mfg Bus Act (Feb) (mkt 60.0, prev 59.8)
• 15:00 US ISM N-Mfg Employment Idx (Feb) (prev 61.6)
• 15:00 US ISM N-Mfg New Orders Idx (Feb) (prev 62.7)
• 15:00 US ISM N-Mfg Price Paid Idx (Feb) (prev 61.9)

Looking Ahead – Events, Other Releases (GMT)

• 16:00 Treasury announces 4-week bills (e: $60 bn)
• 16:30 Treasury auctions $51 bn 13-week and $45 bn 26-week bills
• 16:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $340 mn)
• 18:15 Fed’s Quarles on foreign bank regulation; Washington, DC

Currency Summaries

EUR/USD

• EUR/USD sold-off 1.2319-1.2269 at the start of the European session
• Pair finds support close to the top of the daily Ichimoku cloud 1.2271-1.2125
• Thicker clouds are harder to break, offer greater support
• Pair rebounds to reach 1.2335 then slips back close to the opening level ahead NA
• EUR/JPY down in tandem reaches 129.35 just below 200-WMA @ 129.59
• Bounce back over 130 as Italy risks recedes & stocks rise, DAX 0.8%/FTSE 0.3%
• EUR 500mln 1.2300 expiries may attract
• U.S. services ISM at 15GMT f/c 59.0 from 59.9

USD/JPY

• USD/JPY has seen a narrow range of 105.57-74
• 105.00 option barriers remain intact for now
• Yen positioning to aid USD/JPY bulls’ recovery
• Sell-rally strategies remain in place on JPY short overhang
• Japanese retail, carry players amongst those caught long, needing to hedge

CHF

• USD/CHF Friday fall arrested by the daily kijun at 0.9339
• Marginally firmer early Monday at 0.9366 but tight 0.9348-81 range
• Broad dollar gains but tentative at best vs the CHF
• EUR/CHF Bullish candle Friday but capped by 30DMA and again early Monday
• Cross plays 1.1511-1.1566 and down on the day at 1.1536 into New York
• Swiss sight depo data: domestic depos fall and total rises
• ISM Services index & U.S. trade tariff announcement key events Monday

GBP

• Cable extended north from 1.3767 to 1.3835 after UK service PMI beat
• 54.5 vs 53.0. 1.3767 was early Europe low after EUR/USD fell to 1.2269
• GBP/USD offers expected near 1.3850 (former support level)
• 1.3849 is 38.2% of 1.4070 (Feb 26 high) to 1.3712 (March 1 low)
• Large 1.3830 option expiry for 10am ET NY cut, GBP 451mn strike
• EUR/GBP fell to 0.8908 early Europe on Italian election uncertainty

USD/CAD

• USD/CAD rose to threaten 1.2915 during the European am
• 1.2920 was Friday’s 2018 high as NAFTA concerns weighed on CAD
• Latest round of NAFTA talks end today (Monday)

AUD/USD

• AUD/USD eased to an intra-day low of 0.7733 in early European trade
• 0.7741-0.7778 was Asia range. Key support 0.7713 (2018 low, March 1)
• RBA is expected to keep its cash rate at 1.5% at 0330GMT

NZD/USD

• NZD/USD elicited fresh support pre-0.7200 in early European trade
• 0.7203 = intra-day low. 0.7207 was Asia low
• Sub-figure support levels 0.7186 (Mar 1 low) and 0.7176 (Feb 8 low)

FX OPTIONS

• Risk premiums pared after German SPD vote and Italian elections
• EUR put and vol premiums drop sharply. ECB and NFP risk limit deeper vol losses
• USD/JPY 105.00 barriers hold firm, well defended, some soon to expire
• Cable hedgers look to 22 March BOE and EU summit for volatility and downside risks
• Big 1.23 EUR/USD expiries this week and huge 105.50 USD/JPY Mon through Wed

COMMENTS

Italian political uncertainty could frustrate euro bulls

Euro bulls could be frustrated by weeks of uncertainty following the Italian election which delivered a hung parliament. While the 5-Star Movement (M5S) becoming Italy’s largest single party and the centre-right alliance receiving the biggest bloc of votes was as expected, the surprise was Lega winning a larger share of the vote than former PM Berlusconi’s Forza Italia. Before the election, the centre-right alliance parties agreed that whichever party received the largest share of the vote would pick the bloc’s candidate for prime minister. Lega was vociferous in its criticism of the euro during the campaign. On Monday, Lega leader Salvini said euro was, is and remains a mistake. The silver lining for euro bulls is that the centre-right alliance does not have enough seats to govern alone–which lessens the risk of Salvini becoming PM. One scenario is the creation of a relatively eurosceptic coalition between the centre-right alliance and M5S, which would likely challenge EU budget restrictions and be little interested in further European integration.

Yen positioning to aid USD/JPY bulls’ recovery

Recent changes in yen positioning give USD/JPY bulls a chance to recover from the 2018 low of 105.24 hit on Friday as U.S. President Trump’s trade war talk weighed on the dollar. Despite increased risk aversion which traditionally sees flows into yen, the pair stabilised on Monday ahead of large option barriers said to be at 105.00. According to IMM data for the week ending Feb 27, the number of yen short contracts dropped 10% to 96,651 from 108,338 which is the lowest amount since October 2017. This gives USD/JPY bulls some room to rebound back above 106.00. Along with recent changes in yen positioning, decent support from the Japanese life insurance sector and semi-official institutions near to the 105.00 level could also limit the downside. Trump doubled down on his plans to hike steel and aluminium tariffs, by threatening to tax European auto imports at the weekend, though this was tempered slightly by a Trump trade advisor.

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