FX Market Update 4-4

Market Briefs 
• EUR/USD 0.07%, USD/JPY -0.44%, GBP/USD -0.18%, EUR/GBP 0.26%
• DXY -0.08%, DAX -1.57%, FTSE -0.73%, Brent -1.73%, Gold 0.76%
• China retaliates for US tariffs, slaps duties on soybeans, planes
• China’s March data set to show gradual cooling in economy as trade war risks grow
• EZ Mar HICP Flash y/y, 1.4%, 1.4% f’cast, 1.1% prev
• EZ Mar HICP ex F&E Flash y/y, 1.3%, 1.3% f’cast, 1.2% prev
• EZ Feb Unemployment rate, 8.5%, 8.5% f’cast, 8.6% prev
• Easter price push keeps ECB on track for ending stimulus
• GB Mar IHS Markit/CIPS Construction PMI, 47.0, f’cast 50.8, 51.4 prev
• Japan sees output exceed capacity the most in decade, BOJ slows bond buying
• Italy revises up 2017 deficit, debt due to bank bailouts
• IT Feb jobless rate 10.9%, 11.0% f’cast, 11.1% prev
• Gold gains as dollar dips, U.S.-China trade tensions escalate
• Oil tumbles after China slaps tariffs on U.S. goods

Looking Ahead – Economic Data (GMT) 
• 11:00 MBA Weekly Mortgage Application Indices
• 12:15 Mar ADP National Employment Report, +205k f’cast, +235k prev
• 13:45 Mar Markit Services PMI (final), 54.1 prev
• 14:00 Mar ISM Non-Manufacturing PMI, 59.0 f’cast, 59.5 prev
• 14:00 Feb Factory Orders m/m, +1.7% f’cast, -1.4% prev
• 14:00 Feb Factor Orders ex-Transportation m/m, +0.4% prev
• 14:30 EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT) 
• 13:45 FedTrade 15-year Fannie Mae/Freddie Mac (max $345 mn)
• 13:45 FRB St. Louis’s Bullard speaks at bankers association; Little Rock, AR
• 15:00 FRB Cleveland’s Mester speaks on “Diversity in Economics”; Wilberforce, OH

Currency Summaries
EUR/USD
• EUR/USD boosted to 1.2315 on news of latest China tariffs
• Opened 1.2278 with session low in Asia at 1.2257 (NA low yesterday 1.2254)
• Risk-off reaction fairly muted with pair subsequently lower to 1.2289
• Specs heavily positioned for EUR rise so predisposed to sell bullish news
• EZ HICP 1.4% yy in March as f/c but still well below target
• Hedging for EUR 775mln expiries 1.2275-90 today likely anchoring spot

USD/JPY 

• USD/JPY drops sharply as China announces additional tariffs as risk is hit
• Hour when tariffs announced saw USD/JPY open it at 106.65 and close at 106.20
• That was the eighth biggest hourly decline of 2018
• Spot has since found support at 105.99 for now as bids seem to return
• There could be a build up of support ahead of the 105.79 daily tenkan line

GBP 

• Cable rose from 1.4055 to 1.4085 before big UK construction PMI miss
• 47.0 vs 50.8 f/c. Steep drop blamed on the “Beast from the East”
• 1.4052 = low since 1.4085 amid risk aversion: S&P E-mini -1.4%
• USD is on a higher rung of safe-haven currency ladder than GBP
• Risk aversion due to China unveiling additional tariffs on U.S. goods
• EUR/GBP up by a quarter-penny to 0.8745 during the European am

USD/CAD 

• USD/CAD rose to 1.2830 European am high as oil prices fell
• Oil price fall followed China slapping tariffs on U.S. goods
• WTI at USD 62.35/barrel just before 6am ET, 115 cents lower on the day
• 1.2775 was five-week low for USD/CAD in Asia (1.2782 = Monday’s low)

AUD/USD 

• AUD/USD fell to 0.7665 intra-day low during European am on risk aversion
• S&P E-mini -1.35% after China announces additional tariffs on U.S. goods
• Australia relies heavily on trade, so trade war fears are bad for the AUD

NZD/USD 

• NZD/USD held below 0.73 through the European am amid risk aversion
• S&P E-mini -1.4% after China announces additional tariffs on U.S. goods
• NZD/USD scaled an eight-day peak of 0.7296 in Asia
• 0.7275 option expiry for 10am ET NY cut, NZD 324mn strike

OPTION EXPIRIES

• EUR/USD: 1.2200 (702M), 1.2275-1.2290 (774M) 1.2325 (488M), 1.2350 (757M)
• EUR/USD: 1.2400 (1.133 BLN)
• USD/CAD 1.2900 (150M), AUD/USD: 0.7700 (236M)
• USD/JPY: 106.90 (530M), 106.00 (522M) 105.85-90 (740M), 105.55 (520M)

COMMENT

Italian political puzzle is headache for euro bulls

The complicated political situation in Italy is a headache for euro bulls. Formal talks to establish a new Italian government get underway today, less than 24 hours after the 5-Star Movement (M5S) ruled out joining a coalition with Berlusconi’s Forza Italia. However, M5S leader Di Maio said he is open to talks with the eurosceptic Lega–who were partners with Forza Italia in last month’s inconclusive election (when Lega unexpectedly won a larger share of the vote than Forza Italia). The euro will take a hit if a government between the M5S and Lega is formed when the Italian political music stops: both parties are hostile to EU rules on areas including budgets, trade and immigration. Di Maio also said he is open to talks with the centre-left Democratic Party (PD), though not to its former leader Renzi. The euro could elicit a boost if an M5S-PD alliance is formed, on relief that Lega is not in government. EURUSD:

This week’s NFP data is a big deal for FX traders

This week’s U.S. jobs report is more significant than usual with big FX moves likely to follow in April. In a familiar pattern for payrolls data the dollar is rising ahead the event, that going by most NFP reactions will cue up a sizeable USD/JPY sell-off after. However, specs are no longer short JPY and that could alter the post-data reaction significantly. With USD/JPY so close to the major 105.00 level a break is certain if measured by 4 of the last 5 moves on NFP releases, targeting 99-100. However, should the trend break and USD/JPY put in a base its potential to rise will be bolstered by sizeable JPY selling out of Japan for the new financial year, and a return to 110 could easily follow with USD/JPY then returning to a range bias, perhaps 105-112. Whatever USD/JPY does has big impactions for FX traders who hold USD 25 billion of shorts versus EUR and GBP. USD 25billion is something of a high water mark for spec betting beyond which big reversals usually occur

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