FX Market Update 7-3

Market Briefs

• EUR/USD 0.25%, USD/JPY -0.54%, GBP/USD -0.1%, EUR/GBP 0.36%
• DXY -0.19%, DAX -0.37 %, FTSE -0.11%, Brent -0.74%, Gold -0.12%
• IMF’s Lagarde says nobody wins a trade war
• After tariff fight loss, Trump economic adviser Cohn quits
• EZ GDP Revised QQ Q4, 0.6%, f’cast 0.6%, prev 0.6%
• EZ GDP Revised YY Q4, 2.7%, f’cast 2.7%, prev 2.7%
• GB Halifax House Prices MM Feb, 0.4%, f’cast 0.3%, prev -0.6%
• GB HalifaxHousePrice 3M/YY Feb, 1.8%, f’cast 1.6%, prev 2.2%
• UK’s Hammond: sceptics are wrong to say banks can’t be in Brexit deal
• EU offers Britain modest free trade deal, limited financial services access
• China FX reserves fall in February, first drop in 13 months
• China reassures that fiscal policy still expansionary despite deficit cut
• South Korea’s Moon says sanctions on North to stay, too early to be optimistic
• Berlusconi says will support League leader as Italy prime minister
• Gold slips after hitting 1-week high on trade war fears
• Oil caught in broader market downdraught as concern grows over U.S. trade

Looking Ahead – Economic Data (GMT)

• 12:00 US MBA Mortgage Applications (w/e) (prev 2.7%)
• 12:00 US Mortgage Market Index (w/e) (prev 382.9)
• 12:00 US MBA Purchase Index (w/e) (prev 239.4
• 12:00 US Mortgage Refinance Index (w/e) (prev 1,168.5)
• 12:00 US MBA 30-Yr Mortgage Rate (w/e) (prev 4.64%)
• 13:15 US ADP National Employment (Feb) (mkt 195k, prev 234k)
• 13:30 US International Trade MM $ (Jan) (mkt -55.1 bln, prev -53.1 bln)
• 13:30 US Goods Trade Balance (R) (Jan) (prev -74.40 bln)
• 13:30 US Labor Costs Revised (Q4) (prev 2.1%, prev 2.0%)
• 13:30 US Productivity Revised (Q4) (prev -0.1%, prev -0.1%)
• 13:30 CA Trade Balance C$ (Jan) (mkt -2.50 bln, prev -3.19)
• 13:30 CA Labor Productivity Rate (Q4) (prev -0.6%)
• 15:00 CA BoC Rate Decision (mkt 1.25%, prev 1.25%)

Looking Ahead – Events, Other Releases (GMT)

• 12:30 Fed’s Dudley speaks at neighborhood recovery tour; San Juan, PR
• 13:00 Fed’s Bostic speaks at “Fireside Chat” event; Ft. Lauderdale, FL
• 16:45 FedTrade operation 30-year Ginnie Mae (max $645 mn)
• 19:00 CEA Chair Hassett testifies on the Economic Report of the President before Joint Economic Cmte; Washington, DC

Currency Summaries

EUR/USD

• EUR/USD edges higher after confirmation of EZ economic strength
• Q4 EZ GDP confirmed 0.6% qq and 2.7% yy
• EUR/USD 1.2422-1.2434 in reaction (Asia high 1.2433)
• Feb 19 high 1.2435. Resistance above at 1.2500 and 30-day bollinger 1.2511
• More gains pre-ECB unlikely. High euro to draw dovish response
• Traders widely long euro might (prudently) see a chance to book a profit

USD/JPY

• USD/JPY fell on Cohn exit, weakness set to persist
• Spot persistently sold on EBS since the first hour of the Asian session
• Tried to bounce from 105.45 session low with Nikkei but remains heavy
• Cohn exit caused largest hourly fall (47 pips) and range (61 pips) of 2018
• Expect consolidation as the large 105.50 (1.6Bln) NY cut expiry pins spot
• Bears have the upper hand, however, momentum remains negative

CHF

• EUR/CHF an out-performer since Feb 27: resistance points cleared
• Plays 1.1632 to 1.1670 early Wed and trading highs into New York
• Korea news added weight to shift away from CHF and: talk of RM demand Tues
• However, cross now stalling ahead of a thin daily cloud, 1.1687
• Trump’s tariff took another twist with Cohn departure
• Close back under converged 55/100-DMAs to take heat out of the bull run
• Bull resumption to target 1.1686 61.8% Fibo off 1.1833-1.1448 drop

GBP

• Cable fell to 1.3846 during the European am on risk aversion after Cohn exit
• Navarro and Kudlow are leading candidates to succeed Cohn
• Kudlow co-authored recent National Review piece touting merits of strong USD
• EUR/GBP rose to a 14-week peak of 0.8968 during the European am
• 0.8980 (Nov 28 high) and 0.9000 are resistance levels
• EU’s draft guidelines on future EU/UK relationship due at 1215GMT

USD/CAD

• USD/CAD rose to 1.2960 in Asia on Cohn exit news. 1.2916 = ensuing low
• BoC is expected to keep its key policy interest rate at 1.25% at 1500GMT
• Accompanying statement of prime importance for the CAD
• 1.3002 = recent 8mth high for USD/CAD on NAFTA angst

AUD/USD

• AUD/USD traded modest 20 pip range thru European am, 0.7799-0.7819
• 0.7772 was Asia low on risk aversion after Cohn exit news. 0.7772 = 100DMA
• Tuesday’s high was 0.7842 after risk appetite rose on Korea summit news

NZD/USD

• NZD/USD held below 0.7300 thru the European am: 0.7271 = session low
• Large 0.7300 option expiry for 10am ET NY cut, NZD 760mn strike
• 0.7311 was Tuesday’s 8-day high after Korean April summit news
• Risk appetite subsequently damaged by Cohn exit news

FX OPTIONS

• Vols underpinned by USD weakness and mild risk aversion post Cohn resignation
• USD/JPY by big 105.50 expiry, tame vol reaction suggests 105 barrier fears limited
• EUR/USD O/n vol on low side of previous pre ECB pricing – low expectations
• Cable vols underpinned at value levels – cheap vs realised/actual vol
• O/n USD/CAD topside vulnerable over BoC today – short gamma above 1.30

COMMENT

EUR in firing line if Lega’s Salvini gets Italy job

The euro has so far proven resilient to political risks from Italy but this may change and the single currency will be hit if eurosceptic Lega leader Salvini becomes Italian prime minister. Earlier this week, Salvini, who is bidding to form a government, said “the euro was, is and remains a mistake”. On Wednesday, Forza Italia (FI) leader Berlusconi said “in full respect of our agreements, we will now loyally support attempts by Salvini to create a government”. Lega unexpectedly won a larger share of the vote than its main centre-right coalition partner FI in Sunday’s general election, opening the door to the possibility of Salvini becoming PM. A major hurdle to Salvini’s hopes is the fact that the centre-right bloc is 50 seats short of a majority in the 630-seat lower house. On Tuesday, Lega’s economics chief Borghi said he thought the most probable government would be a tie-up between M5S, the largest single party, and the PD. Former PM Renzi resigned as PD leader on Monday but said he would not step down until a government is formed.

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