FX Market Update 9-4

Market Briefs
• EUR/USD -0.11%, USD/JPY 0.19%, GBP/USD 0.08%, EUR/GBP -0.16%
• DXY 0.12%, DAX 0.6%, FTSE -0.09%, Brent 0.48%, Gold -0.36%
• China blames U.S for trade frictions, says negotiations currently impossible
• China should invest in assets other than Treasuries – c.bank adviser
• Kuroda says BOJ will eventually need to normalise policy
• DE Feb Trade Balance, EUR, SA, 19.2 bln, 21.4 bln f’cast, 21.3 bln prev, 21.5 bln r’vsd
• DE Feb Exports MM SA, -3.20%, 0.20% f’cast, -0.50% prev, -0.40% r’vsd
• DE Feb Imports MM SA, -1.3%, 0.3% f’cast, -0.50% prev, -0.2% r’vsd
• EZ Apr Sentix Index, 19.6, 20.0 f’cast, 24.0 prev
• UK house prices rise more than expected in March – Halifax
• UK watchdog reviews cryptocurrencies, Brexit stretches resources

Looking Ahead – Economic Data (GMT) 
• 14:00 U.S. Mar Employment Trends Index, 107.7 prev

Looking Ahead – Events, Other Releases (GMT) 
• 13:00 Presentation of the ECB Annual Report 2017 by ECB Vice President Vitor Constancio at the ECON Committee – Brussels
• 15:00 U.S. Treasury announces 4-week bills (e: $55 bn)
• 15:30 U.S. Treasury auctions $48 13-week and $42 bn 26-week bills
• 15:45 U.S. FedTrade 30-year Fannie Mae / Freddie Mac (max $780 mn)
• 16:45 Participation by ECB Executive Board member and chief economist Peter Praet in a meeting of the European Finance Forum e.V. – Frankfurt
• 18:00 U.S. Congressional Budget Office issues annual Budget and Economic

Currency Summaries
EUR/USD 
• EUR/USD initially gets 1.2261-86 boost after China deval talk
• Drifts back towards lower-end of that range thereafter
• German exports in Feb weakest since 2015
• No notable data today. U.S. PPI/CPI Tue/Wed
• Resistance @ 200-HMA 1.2295. 21/55-DMAs 1.2317/39
• Hourly cloud 1.2262-42 and Feb 5/6 lows 1.2218/15 support

USD/JPY 
• USD/JPY 106.79-107.20 range so far Mon, pushing higher early London
• Strong resistance 107.21-22 – 55DMA and base of daily cloud hold for now
• Above targets Thurs-Fri highs 107.49-46, 50% of 110.48-104.56 at 107.53
• Support Thurs/Fri lows 106.78-72. PM Abe and BoJ gove Kuroda had meeting
• BoJ and Government will cooperate for powerful economic growth ahead of sales tax hike
• Kuroda will continue with powerful easing to achieve 2% price target

GBP 
• Cable traded 37 pip range during European am, 1.4080-1.4117
• Low was plumbed after USD/CNY rose on Bbg report
• Report says China studying depreciation as tool in US trade row
• 1.4116 was early Europe high, before greenback caught bid
• EUR/GBP eased to threaten 0.8695 after strong UK house price data
• 0.8695 = 1.15 GBP/EUR. Corporate bids regularly parked around 0.8695

CHF
• EUR/CHF held below 1.18 through the European am
• Offers just above the figure have kept a lid on the cross recently
• Swiss March jobless rate 2.9%, as expected

USD/CAD 
• USD/CAD has risen to a five-day high of 1.2818 on NAFTA pessimism
• No NAFTA deal in principle to be announced at Lima summit-Rtrs sources
• The Lima summit is on FridaySaturday. 1.2765-1.2785 was Asia range

AUD/USD 
• Offers ahead of 0.77 kept a lid on AUD/USD in early European trade
• Supply near the figure also capped the pair in Asia and on Friday (post-NFP)
• Recent talk of bids ahead of 0.7640-50 (0.7652/58 = Apr 3/6 lows)
• 0.7664 = European am intra-day low. China iron ore down to 10mth low

NZD/USD 
• NZD/USD ran into resistance at 0.7305 after rising from 0.7271 (Asia low)
• More offers expected near 0.7322 (last Thursday’s three-week high)
• Large 0.7270 option expiry Tuesday, NZD 601mn strike
• AUD/NZD fell to a nine-month low of 1.0511 during the European am

FX OPTION 
• G10 Implied vols remain low as broader ranges hold
• US/China trade spat ongoing but largely ignored by FX for now
• US CPI data main event risk Wed, but limited risk premiums suggest tame reaction
• EUR/USD flows mostly short dated within 1.22-1.2350. USD/JPY within 106-108
• Big 1.21-1.26 EUR/USD barriers in play, AUD barriers remain at 0.7600

COMMENT

USD shorts in for further squeeze if US CPI beats 
There is scope for a fresh squeeze on short USD positions if U.S. March inflation data comes in higher than expected on Wednesday. Forecast-beating inflation would be a USD-positive boost for hawks advocating three more 25bps Fed rate rises this year, to follow March’s quarter-point hike. Fed funds futures are currently pricing just under two more 25bps Fed hikes before 2019. Annualized CPI is forecast to rise to 2.4% from 2.2% in February, with core CPI forecast to rise to 2.1% from 1.8% previously. A prior squeeze on USD shorts helped depress the euro and yen to five-week lows against the greenback last week, before Friday’s March NFP miss hit the USD. The latest IMM data showed speculators maintained a hefty USD short position, valued at USD 20.71 billion, in the week to April 3. On Friday, Fed chairman Powell said the Fed will likely need to keep raising U.S. interest rates to keep inflation under control. Minutes from last month’s FOMC meeting are also due Wednesday.

China may favour a stronger yuan so deval unlikely
China may be seeing greater merit in a stronger yuan making a devaluation very unlikely. Many in FX markets would think China would use a weaker yuan as a weapon in its ongoing trade spat with the United States but the currency has risen 2.5 percent on a trade weighted basis this year. China battled capital outflows for a long time with the FX reserve falling almost USD 1 trillion between June 2014 and December 2016, 700 million of that after the yuan devaluation in 2015. Capital flows have stabilized but the FX reserve has only crept back up around USD 100 billion since, so a devaluation that would surely reignite outflows and hit the reserve seems improbable. Indeed, with a big current account surplus that can absorb the shock of a rising yuan, China is well placed to take advantage of U.S. policies that have undermined the dollar with a stable yuan more likely to be used for trade in Asia and favoured by reserve managers.

A CNY devaluation may lift euro and JPY 
Market speculation that China may devalue the yuan is swirling amid mounting trade tensions with U.S. and should the authorities go ahead and devalue, large components of the trade weighted index such as euro and yen are likely to rally. When China devalued the yuan by 2.1% in August 2015, the euro and yen–which represent roughly 21% and 14% respectively of the CNY index–gained around 5% in value soon after. These moves came before China officially moved to divert focus from the dollar to the index in 2015. The yuan’s impact on larger components of the CNY basket have been notable since December 2015 with JPY never topping the level it was trading at the time and euro only briefly trading lower. EUR/USD today near 1.2300 compared with 1.05 in December 2015 and USD/JPY close to 107 versus 123. Through December 2015 until July 2017, the CNY was either falling or held at a low level but has risen around 4 percent from the lows of last year.

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