FX Market Update 8-3

Market Briefs 
• EUR/USD -0.25%, USD/JPY flat, GBP/USD -0.21%, EUR/GBP -0.08%
• DXY 0.17%, DAX -0.44 %, FTSE -0.01%, Brent -0.17%, Gold 0.02%
• ECB eyes baby step towards stimulus exit
• China warns of “necessary response” in event of trade war with U.S.
• DE Industrial Orders MM Jan, -3.9%, f’cast -1.6%, prev 3.8%
• GB RICS Housing Survey Feb, 0, f’cast 7, prev 8
• Japan punishes seven cryptocurrency exchanges over regulatory lapses
• Europe has “arsenal of weapons” to respond to Trump’s tariffs: EU’s Moscovici
• Oil prices under pressure from rising U.S. inventories, output
• Gold firm as investors await clarity on Trump’s tariff plan

Looking Ahead – Economic Data (GMT) 
• 13:15 CA House Starts, Annualized (Feb) (mkt 216.6k, prev 216.2k)
• 13:30 CA Building Permits MM. (Jan) (mkt 1.3%, prev 4.8%)
• 13:30 CA New Housing Price Index (Jan) (mkt 0.1%, prev 0.0%)
• 13:30 US Initial Jobless Claims (w/e) (mkt 220k, prev 210k)
• 13:30 US Jobless Claims 4-Wk Avg (w/e) (prev 220.50k)
• 13:30 US Continued Jobless Claims (w/e) (mkt 1.921 mln, prev 1.931 mln)

Looking Ahead – Events, Other Releases (GMT) 
• 12:45 ECB Governing Council meeting
• 14:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $835 mn)
• 16:00 Treasury announces 13- and 26-week bills (e: $51/45 bn)
• 16:00 Treasury announces new 3- and reopened 10-year notes and reopened 30-year bonds (e: $28/21/13 bn)

Currency Summaries
EUR/USD
• EUR/USD eases slightly ahead today’s ECB rate decision and statement
• EUR/USD drops to 1.2378 from a 1.2414 high in Europe, Asia 1.2395-1.2415
• German industrial orders down a sharp 3.9% in Jan a likely influence
• Traders heavily long of euros into the event, likely some profit-taking
• ECB rates seen unchanged. Draghi to juggle growth vs inflation and high euro
• EUR 1.9bln option expiries 1.2290-05 and 1.2350 may attract today

USD/JPY 
• Sustained selling on EBS since Mon may led to a near-term squeeze higher
• Medium-term bias on downside, short squeeze limited to Fibos
• Real money said to be selling ahead of the Japanese fiscal year end
• USD/JPY trades in line with risk intra-day, risk rebound could see spot rise
• 48H/72H log correlations between USD/JPY and Nikkei futures both above +0.50
• Bulls have struggled above 106.00, BOJ and looming NFPs ignored
• USD/JPY range has been 105.90-106.21 so far this session

CHF
• EUR/CHF six-day rally clears thin daily cloud at 1.1686 Wed
• Just holding above the cloud early Thurs as ranges tighten
• Cross plays 1.1685-1.1710 with 1.1711 the Wed top
• Improved risk sentiment just keeping the CHF off-balance
• This scenario keeping SNB sidelined and this supported by reserve data
• Spot CHF bid with the cross and eyes falling daily cloud base at 0.9617
• Swiss headline jobless falls to 3.2% in Feb from 3.3% in Jan

GBP 
• Cable fell from 1.3910 to 1.3861 during the European am, pre-ECB event risk
• EUR/USD fell from 1.2415 to 1.2372. EUR/GBP range 0.8919-0.8931
• 0.8917 is low water-mark for cross since Wednesday’s 14wk high of 0.8968
• Cable support levels 1.3846 (Wednesday’s low) and 1.3817 (Tuesday’s low)
• 20% probability of a disorderly Brexit, according to latest Reuters poll
• Probability was also 20% in Feb and Jan vs 25% in Dec and 30% last Oct

USD/CAD 
• USD/CAD rose to a high of 1.2947 into the North American open
• 1.2868 was Asia low on latest steel and aluminium tariff news
• Trump plans to offer Canada, Mexico 30-day tariff exemption-WH official

AUD/USD 
• AUD/USD eased to an intra-day low of 0.7795 during the European am
• 0.7839 was Asia high after above f/c Aussie Jan trade surplus
• Support levels 0.7789 (Wednesday’s NY low) and 0.7771 (100DMA)

NZD/USD
• NZD/USD dropped to threaten 0.7255 during the European am
• 0.7255 was Wednesday’s low. 0.7298 was Asia high

FX OPTIONS
• Implied vols mostly heavy as spot markets cling to ranges ahead of key events
• Event risk premiums certainly on the tame side in to ECB, BoJ and NFP
• Markets clearly not expecting any surprises and subsequent spot volatility
• USD/JPY solid support from 105 barriers, large 106 vanilla expiry today
• EUR/USD remains biased higher over the medium term, favours EUR call options

COMMENTS
Risk rebound may propel AUD/USD to 30-DMA
Once U.S. non-farm payrolls are out of the way on Friday, there is potential for a rebound in risk, especially after the U.S. opened the door to tariff exclusions for some countries which could provide value for AUD/USD bulls. AUD/USD has a solid foundation for a near-term drive to the 30-DMA, which is currently at 0.7882. The pair suffered a setback in a short space of time on Wednesday but later emerged relatively unscathed, highlighting the underlying resilience of AUD/USD bulls and the scope for eventual gains. AUD/USD fell temporarily on Wednesday when risk assets were hit by news top White House economic adviser Gary Cohn had resigned, increasing the likelihood U.S. President Trump would go ahead with his proposed tariffs, which could prompt a global trade war. Then Australian Q4 GDP data showed growth rose at a slower pace than the market had expected. However, AUD/USD was underpinned as RBA Governor Philip Lowe played down the data and remained confident of a pick up. Daily Bollinger

Italy is elephant in the room for EUR as ECB meets
Italian political developments may impact the euro in coming weeks, with the composition of any new government of prime interest. The most positive outcome for the euro would be if the 5-Star Movement (M5S) and the ruling centre-left Democratic Party (PD) agree a full coalition deal. M5S dropped its longstanding commitment to hold a euro referendum before Sunday’s inconclusive election in which it became Italy’s largest single party. The next best outcome for the euro would be if the PD said it could support M5S on a policy-by-policy basis. In contrast, the most negative outcome for the euro would be if the centre-right bloc–which includes the eurosceptic Lega, teams up with M5S. Any such partnership would likely challenge EU budget restrictions and could bring Italy into conflict with the European Commission. On Wednesday, the Commission said Italy is one of the EU states experiencing “excessive” economic imbalances that might impinge on other parts of the bloc. ECB President Draghi, an Italian, may reference Italy’s election during his press conference following today’s ECB meeting

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