FX Market Update 19-3

Market Briefs

• EUR/USD 0.05%, USD/JPY -0.02%, GBP/USD 0.5%, EUR/GBP -0.48%
• DXY -0.12%, DAX -1.07 %, FTSE -1.31%, Brent -0.26%, Gold -0.04%
• Putin savours big victory after winning six more years at Russia’s helm
• EU, UK reach broad deal on brexit transition terms- WSJ
• U.S. tariffs, China trade tensions overshadow G20 finance meeting
• WTO chief says U.S. wants reform in trade body, has raised concerns
• UK households report fastest income growth since 2016 – IHS Markit
• Italy industry output slumps in January after three straight rises
• China forms new economic team as President Xi kicks off second term
• Oil prices fall as increased U.S. drilling points to higher output
• Gold falls for fourth day as dollar stays firm ahead of Fed meeting

Looking Ahead – Economic Data (GMT)

• No major economic data is expected

Looking Ahead – Events, Other Releases (GMT)

• 13:40 Fed’s Bostic discusses the Community Reinvestment Act; Miami, FL

Currency Summaries

EUR/USD

• EUR/USD up 1.2262-93 in Europe after trading down 1.2303-1.2258 in Asia
• Most traders sidelined ahead Wednesday’s Fed rate decision
• Now considered a safer asset EUR gains may be due to stock drops today
• Main European bourses all down and heaviest volume U.S. futures -0.5%
• Should risk aversion grow then the large euro longs are at risk
• A paring of risk usually precedes any move towards safer assets

USD/JPY

• USD/JPY remains weighed down by a market still risk-off as Fed comes into view
• USD/JPY sees a range of 105.68-106.15 so far this ession
• Bids still @105.50 to 105.00 but large stops tipped sub-105.00 option KOs

GBP

• GBP up on Brexit transition deal speculation into Barnier/Davis meeting
• Cable up to three-week high of 1.4017 from 1.3913 late Asia low
• EUR/GBP down to five-week low of 0.8768 vs 0.8805 Asia low
• EU news conference on Brexit negotiations scheduled for 1145GMT
• GBP could elicit further boost if Brexit transition deal is agreed
• Pound likely to fall if no deal has been agreed

USD/CAD

• 1.3082 = low water-mark for USD/CAD since 1.3124 European am high
• 1.3124 was a fractionally fresh nine-month high. 1.3123 was Asia high
• Drop to 1.3082 influenced by some profit-taking on long positions
• 1.2804 was USD/CAD low at the start of last week (before dovish Poloz)

AUD/USD

• 0.7711 = high water-mark for AUD/USD since 12wk low of 0.7687 late Asia
• There is a large 0.7710 option expiry Tuesday, AUD 740mn strike
• Drop to 0.7687 fuelled by risk aversion amid trade war fears

NZD/USD

• 0.7220 = high water-mark for NZD/USD since 18-day low of 0.7197 in Asia
• Drop to 0.7197 courtesy of risk aversion: Nikkei closed down 0.9%

FX OPTIONS

• Option vols higher with a plethora of event risk this week – FOMC highlight Wed
• Many of the EUR/USD range barriers expire this week, may increase spot volatility
• USD/JPY better prepared for 105 barrier break after weeks of lower vol/hedging premiums
• Cable added risk of UK inflation and jobs data and EU summit to boost 1-week options
• AUD related vols biggest gainers over recent sessions on fears of deeper AUD decline

COMMENTS

Pound to react to imminent Brexit news conference
Sterling will react to a news conference on the Brexit negotiations scheduled by the European Commission for 1145GMT. The pound should rise if the news conference says a Brexit transition deal has been agreed. In contrast, GBP is likely to fall if no deal has been agreed. The EU’s chief Brexit negotiator Barnier is due to meet British Brexit secretary Davis in Brussels shortly after 1000GMT following an urgent meeting between EU negotiators and EU member state envoys. The pound has risen against the USD and euro ahead of the Barnier/Davis meeting, with EUR/GBP falling to its lowest level this month. If a Brexit transition deal is agreed, it is expected to encompass the period from Britain’s scheduled EU exit in March 2019 to the end of 2020. GBP/USD is 7% below its 1.5022 Brexit referendum day high, with EUR/GBP 15.5% above its 0.7600 low on 23 June 2016.

USD/JPY likely to see orderly fall as FOMC looms
Risk aversion continues to weigh on USD/JPY and equities with the Nikkei 225 closing down 0.9% on Monday ahead of the looming FOMC meeting . The bias for USD/JPY remains on the downside with scope for an eventual break of large option barriers at 105.00, although there are said to be decent sized bids ahead of 105.00 protecting them. IMM positioning and EBS flow information shows a further reduction in USD/JPY longs, meaning any further falls could be orderly as there are fewer vulnerable downside sell stops to be triggered. The major exception to that are sell stops tipped below 105.00 which are said to be large. IMM data for the week ending March 13 saw the number of yen short contracts drop from 86,845 to 79,539, the smallest amount since October 2017. EBS data since March 13 reveals further net buying of the yen meaning the underlying yen short speculative position has likely reduced even further.

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