FX Market Update 26-3

Market Briefs

EUR/USD 0.45%, USD/JPY 0.33%, GBP/USD 0.65%, EUR/GBP -0.19%
DXY -0.27%, DAX 0.63%, FTSE 0.36%, Brent -0.1%, Gold 0.11%
FR GDP QQ Final Q4, 0.7%, 0.6% prev
UK Fiance Mortage Approvals 38.120k, 40.117k prev
US, S.Korea revise trade deal, Korean steel faces quota
U.S. sends China to-do list to reduce trade imbalance – WSJ
Germany’s Weidmann says diversity of views is strength for ECB
Brexit delivers longer blow to bank sentiment than global crisis -survey
Political worries push up Italian bond yields; ratings upgrade helps Spain
IMF’s Lagarde proposes “rainy day fund” for euro zone
Gold dips as trade war fears ease on report of U.S.-China talks
Oil prices find support in trade talks and Mideast tensions

Looking Ahead – Economic Data (GMT)

13:30 US National Activity Index Feb, 0.12 prev
15:30 US Dallas Fed Mfg Bus Idx Mar, 37.20 prev

Looking Ahead – Events, Other Releases (GMT)

N/A BoE’s Haldane speaks at Edinburgh, Scotland
13:00 ECB’s Nouy speaks to European Parliament in Brussels, Belgium
16:30 US Fed’s Dudley speaks to the US Chamber of Commerce in Washington
20:30 Fed’s Mester speaks on Public Policy and Finace in Pinceton, New Jersey
23:10 US Fed’s Quarles speaks before the Operation HOPE Global Forums 2018 annual meeting in Atlanta

Currency Summaries

EUR/USD

EUR/USD higher 1.2359-1.2400 in Europe after Asia 1.2343-1.2388
Stock recovery underpinning risk appetite so supports EUR/USD trend plays
L-term trend solid implies eventual break up from Feb/Mar consolidation
Resistance at Mar 13/14 highs 1.2408/13 then Mar 7/8 high 1.2447/46
Option vols remain low suggesting it’s worth seeking highs 1.2400-50

USD/JPY

USD/JPY hit fresh 2018 104.56 low in early Asia, before rebound
Large stops said to be clustered below sub-104.50
Despite Japanese bids still from @104.64 low Friday, bias down
But dwindling speculative longs may halt USD/JPY fall [nL1N1R80AB]
Sell-rally strats still in place, some JPY shorts still, trade war worries
Large 105.00 NY expiry worth 1.2 bln USD anchors spot near-term

GBP

Cable ascent to test 1.4220 (March 22 high) fuelled by a rise in risk appetite
S&P E-mini +1.35% after WSJ report US, China negotiating over trade
China offers to buy more US semiconductors to cut trade surplus – FT
1.4138-1.4169 was Asia range. 1.4220 = 7wk high after 7-2 MPC vote split
Retreat from March 22 high (to 1.4077) was influenced by risk aversion
UK Q4 C/A deficit will be revealed on Maundy Thursday: GBP 24bln f/c

USD/CAD

USD/CAD eased to 1.2841 during the European am as risk appetite rose
S&P E-mini +1.35%. 1.2898 was Asia high. Bids expected near 1.2800
1.2824/30 = March 22/23 lows. 1.2804 = March 12 low
Huge 1.2850 option expiry Tuesday, USD 1.3bln strike

AUD/USD

AUD/USD up to 0.7749 on the back of a rise in risk appetite
S&P E-mini +1.3% after WSJ report US, China negotiating over trade
China offers to buy more US semiconductors to cut trade surplus – FT
0.7695 was Asia low, before trade war concerns ebbed

NZD/USD

NZD/USD up to threaten 0.73 courtesy of a rise in risk appetite
S&P E-mini +1.35% at 1120GMT. 0.7234 was NZD/USD low in Asia

FX OPTIONS

Risk stages marginal recovery since early Asia, Easter holiday looms
Keeps trading subdued and vols on the low side for now
1-month expiry gets ECB to underpin EUR related 1-month vols
50bln EUR/USD 1.22-1.25 expiries through end next week helps contain
GBP/USD and EUR/USD options targetting higher spot levels of late

COMMENT

EUR/USD bulls look for 1.25 breach to extend

The EUR/USD market is very long options (gamma) between 1.2200-1.2500. DTCC charts also show EUR 50 billion expiries between now and the end of next week, which is helping to contain the range, but coverage is much thinner above. This suggests that a 1.2500 breach could see EUR/USD bulls gaining traction, with little related option hedging to slow their ascent. However, with the long Easter weekend looming, dealers are already trimming positions and keeping to the sidelines, so markets could be in for another week of consolidation. In-fact, 1-week expiry options are trading 6.0 vol, a break-even of just 78 pips for the straddle. The topside is still perceived to be the most vulnerable according to options, where EUR call demand is outweighing those buying EUR puts (downside hedges). Last week saw steady buying of 1-month expiry options, with strikes at 1.2500, 1.2600 and 1.2700, giving holders the right to buy EUR/USD at those levels toward the end of April. More of the same is likely today with early demand for 1-month 1.2500, although in limited size for now.

Chart of the Day

At BoE’s cue, UK GDP data next test for sterling

Bank of England Governor Carney and the MPC set up a big day for sterling on Thursday when they tied the likelihood of future interest rate hikes to UK growth of 1.5% yr/yr (Full Story). GDP growth of 1.5% would be the lowest yr/yr reading since June 2013 so hawkish rate setters have placed the bar for hikes very low. But herein lies a problem for GBP traders: whereas the prospect of policy tightening is likely to boost sterling, the likelihood that higher rates will stifle an economy that has markedly slowed suggests that any rally will be undermined by fundamentals. Forecasters expect Q4 GDP to come in weaker at 1.4% yr/yr on Thursday, presumably enough to bar the MPC from hiking in May when a 25bps rate hike has been largely factored in. That suggests the chance of further GBP/USD closes below the critical 200-WMA at 1.4273 are high which may lead cable back to ranges within 1.30-40. Judged by prior 200-WMA breaks, should growth surprise higher, a close above 1.4273 cues up a move towards 1.5500. Such a strong pound will offset the need to raise rates. GBPUSD weekly chart

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