FX Market Update 6-3

Market Briefs

• EUR/USD 0.27%, USD/JPY 0.01%, GBP/USD 0.12%, EUR/GBP 0.12%
• DXY -0.27%, DAX 1.24 %, FTSE 1.11%, Brent 0.41%, Gold 0.37%
• GB BRC Retail Sales YY Feb, 0.60%, f’cast 0.50%, prev 0.60%
• Japan central bank chief tempers talk of easy policy exit
• Japan urges U.S. to shun steel tariffs but makes no threats
• France rejects Britain’s plan for banks to access EU after Brexit
• China regulator to cut banks’ bad debt buffers – sources
• N.Korea makes ‘agreement’ with S.Korea after historic meeting – KCNA
• Oil steady as rally fizzles, OPEC-led cuts lend support
• Gold edges higher on U.S. trade jitters

Looking Ahead – Economic Data (GMT)

• 15:00 US Factory Orders MM (Jan) (mkt -1.3%, prev 1.7%)
• 15:00 CA Ivey PMI (Feb) (prev 51.3)
• 15:00 CA Ivey PMI SA (Feb) (prev 55.2)

Looking Ahead – Events, Other Releases (GMT)

• 12:30 Fed’s Dudley participates in roundtable with USVI non-profit leaders; St Thomas
• 16:30 Treasury auctions $65 bn 4-week bills (size increased $5 bn)
• 16:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $980 mn)
• 20:00 Treasury STRIPS (Feb)
• 22:30 Fed Governor Brainard speaks at Money Marketeers of NYU; New York, NY
• 01:30 Fed’s Kaplan participates in moderated Q&A session before CERAWeek event; Houston, TX

Currency Summaries

EUR/USD

• EUR/USD recovery peaked 1.2365 Mon, 1.2328-63 early Tuesday’s range
• N.Korea willing to talk to US on denuclearisation – EUR/JPY shorts covered
• EUR/USD spikes to new recovery highs 1.2391.
• DE10yr bond yields aid support – gains 5bpt – biggest 1-day rise in a month
• Resistance 1.2402 (61.8% of 1.2556-1.2155) and 20 Feb high 1.2411
• Bias more neutral now, spot in middle of range since mid Jan
• Big expiries 1.23 all week to underpin ahead of thick daily cloud 1.2272-1.2125

USD/JPY

• USD/JPY dives back below 106, big expiry below may draw – Reuters
• Drop from 106.47 Asia high breaks back below 106.00 to hit 105.86
• Large 105.50 strikes worth 2.2bln which are set to expire at the NY cut
• There have been waves of selling on the EBS since London entered the fray
• Size, proximity of 105.50 expiries could be a decent magnet in NY trading
• Abating trade war and BOJ exit concerns saw USD/JPY rise in Asia
• But bulls were stymied by the important 106.48 Fibonacci level

CHF

• Higher U.S yields and some easing of trade war tension supporting
• However, USD/CHF is lacking firm direction and risks settling into ranges
• Recent price extremes at 0.9339-0.9490 provide the initial levels to watch
• Close above the daily tenken, 0.9407, might open up recent
• Swiss Feb CPI data mainly in-line: Y/Y data matched Rtrs poll
• Inflation still too low to shift SNB off negative rates policy
• EUR/CHF bid after 1.1584 breakout: 1.1638 now key res. converged 55/100DMAs

GBP

• Cable based at 1.3817 early Europe after extending south from 1.3877
• 1.3877 was Monday’s high after GBP rose on Brexit transition deal hope
• EU leaders meet March 22-23: GBP-positive if transition deal agreed then
• GBP may react to comments from UK Brexit minister Davis today
• Davis appears before UK parliament’s Brexit select committee from 1400GMT
• Davis/May to meet European Parliament’s Brexit coordinator Verhofstadt ahead

USD/CAD

• USD/CAD ran into resistance ahead of 1.30 during the European am
• Pair traded at 1.30 for the first time since July 2017 on Monday
• IMM speculators have held a net CAD long position since July 2017
• Recent CAD losses spurred by Trump’s planned steel/aluminium tariffs
• Canada is the single largest supplier of steel and aluminium to the U.S.
• BoC meets Wednesday, relatively dovish hold expected

AUD/USD

• Offers pre-0.78 kept lid on AUD/USD either side of the RBA meeting
• Unchanged RBA sounds less upbeat on Australian economic growth
• Large 0.7800 option expiry for 10am ET NY cut, AUD 753mn strike
• 0.7757 was European am low. 0.7726, 0.7713 and 0.7700 supports below
• Australian Q4 GDP data due 7.30pm ET: 0.6% QQ and 2.5% YY expected
• Risk of 0.5% QQ and 2.4% YY after recent disappointing economic indicators

NZD/USD

• NZD/USD ticked up to an intra-day high of 0.7252 during the European am
• AUD/NZD simultaneously dropped to threaten 1.0710 (Monday’s low)
• 1.0763 was cross high in Asia, before RBA sounded less upbeat on growth

FX OPTIONS

• German and Italy event risk paring sees EUR/USD bias flip back to EUR calls
• Vols broadly lower as risk recovers and ranges look set to hold near term
• Event risk limits losses – ECB, NFP, BoJ this week, 21-23 March FED, BoE and EU summit
• Big 105.50-107.00 USD/JPY and 1.2300 EUR/USD expiries all week to help contain
• Post PM May Brexit speech GBP vol setbacks run in to light demand at better value levels

COMMENT

Weaker CAD may find support as BoC grows talons

The weakened Canadian dollar is worth buying now as its lower level will be the fuel for future tightening by the Bank of Canada, which has had to pause its rate hikes during NAFTA renegotiations. On Jan 17 the BoC raised rates but adopted a dovish tone amid the uncertainty surrounding NAFTA. Things have deteriorated with Trump’s threat of tariffs driving the loonie down 4.5% versus USD since the last BOC hike. The weaker CAD has very likely flushed away all the speculative bets on further gains IMM/FX and there may even be a net CAD short position. The weakness of the Canadian dollar will have also undone much of the impact of that January rate hike and USD/CAD is now at harder to break levels. USD/CAD has traded roughly 1.20-1.30 for nine months so option barriers and the strong resistance they provide are likely every 50 ticks from 1.3050. The monthly Ichimoku cloud top, a very long-term resistance marker is 1.3118. USD/CAD monthly chart:

CHART OF THE DAY

EUR/USD bulls need close above 30-DMA to accelerate

EUR/USD have staged a decent recovery in recent days from last Thursday’s 1.2155 trough, but have failed to convincingly overcome the 30-DMA currently at 1.2353 so far. Therefore short-term uncertainties persist. EUR/USD bulls need a daily close above the 30-DMA in order to increase the likelihood of further gains to the 30-day upper Bollinger band, currently at 1.2508. This would also reduce the risk of a short-term relapse back below the 10-DMA now at 1.2293. While the outlook is mixed in the near-term, the medium-term bullish cycle from the November 1.1553 low remains intact. Medium-term bulls found support ahead of the 1.2137 Fibonacci level — 50% retrace of the 1.1718 to 1.2556 (December to February) rise — which adds to the underlying upside bias. So while EUR/USD bulls retain the upper hand, they must sustain trading above the aforementioned 30-DMA or a near-term slump will become inevitable.

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