FX Market Update 10-4

Market Briefs 
• EUR/USD 0.02%, USD/JPY 0.26%, GBP/USD 0.21%, EUR/GBP -0.19%
• DXY -0.01%, DAX 1.11%, FTSE 0.53%, Brent 1.25%, Gold -0.06%
• China’s Xi renews pledges to open economy, cut tariffs this year
• Chinese investment into U.S. slumps in 2017 on policy changes – report
• Dallas Fed’s Kaplan is hopeful rhetoric in U.S.-China trade dispute will de-escalate
• Fed has to be gradual, patient in raising rates- Dallas Fed’s Kaplan
• Normalisation of ECB policy should start now – Nowotny
• Trade war could have negative impact on exchange rates – ECB’s Nowotny
• Bank of England mustn’t dally over next rate hike – McCafferty
• Russian rouble narrows losses, falls by more than 2 pct

Looking Ahead – Economic Data (GMT) 
• N/A U.S. Q1 Atlanta Fed GDPNow Model Forecast for Real GDP growth, +2.4% prev
• 12:15 U.S. Mar House Starts, Annualized, 218.0l f’cast, 229.7k prev
• 12:30 U.S. Mar PPI Final Demand YY, 2.9% f’cast, 2.8% prev
• 12:30 U.S. Mar PPI Final Demand MM, 0.1% f’cast, 0.2% prev
• 12:30 U.S. Mar PPI exFood/Energy YY, 2.6% f’cast, 2.5% prev
• 12:30 U.S. Mar PPI exFood/Energy MM, 0.2% f’cast, 0.2% prev
• 12:55 U.S. w/e Redbook MM, 0.4% prev
• 12:55 U.S. w/e Redbook YY, 4.4% prev
• 14:00 U.S. Feb Wholesale Invt(y), R MM, 0.9% f’cast, 1.1% prev
• 14:00 U.S. Feb Wholesales MM, 0.4% f’cast, -1.1% prev

Looking Ahead – Events, Other Releases (GMT) 
• 13:00 Governor of Norges Bank Oystein Olsen will give speech to Foreign Embassy Representatives – Oslo
• 15:30 U.S. Treasury auctions $45 bn 4-week bills (size cut by $10 bn)
• 17:00 U.S. Treasury auctions $30 bn 3-year notes
• 18:30 U.S. FedTrade 15-year Fannie Mae / Freddie Mac (max $195 mn)
• 22:30 Atlanta Fed President Raphael Bostic speaks about fair housing in a lecture at his alma mater Harvard University – Cambridge, Massachusetts

Currency Summaries
EUR/USD 
• Slightly positive EUR/USD action sees pairs up to 1.2335 in Europe
• Stops triggered over 21-DMA 1.2119 but pair tops ahead 55-DMA 1.2340
• Apr 2 high 1.2345. U.S. CPI eyed higher. EUR/USD may top
• Support at session low 1.2303 and 200/100-HMAS 1.2292-78
• Insight for tomorrow’s data. Core US PPI @ 13.30GMT f/c 2.6% yy from 2.5%

USD/JPY 
• China Pres Xi speech was risk positive o/n and lifts USD/JPY
• Tests above falling 55dma and cloud base 107.15-19 to peak 107.24 for now
• Bigger resistance Fri/Thur hi’s 107.46-49 and 50% of 110.48-104.56 at 107.52
• Potential pull and support from 1.3bln 107.00-10 option expiries Wed
• Market awaits US CPI Wed’s – Next day options price 50 pips break-even
• Underlying support at flat 200HMA 106.63 and overnight lows at 106.62

GBP 
• Cable extended north to 1.4179 after interview with McCafferty published
• McCafferty told Reuters BoE must not dally over next rate hike
• 1.4179 = 13-day high. McCafferty and Saunders voted for hike last month
• Next BoE MPA May 10: 25bp hike expected. RUB weaker again Tuesday
• Rouble’s Monday meltdown influenced GBP/USD rise to 1.4163 Monday
• EUR/GBP down to test 0.8695 key support level, 1.15 GBP/EUR

CHF
• USD/CHF fell from 0.9580 to a 1wk low of 0.9545 during the European am
• Greenback weakness influenced by rise in risk appetite on Xi speech
• EUR/CHF eased from 1.1790 to 1.1769 during the European am

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 
• AUD/USD retreated to 0.7717 after revisiting 0.7738 in early European trade
• 0.7738 was 2wk high in Asia as AUD benefitted from rise in risk appetite on Xi
• Shorts squeezed during rise to 0.7738, from Monday’s low of 0.7652
• Break through 0.7750 could spur more short-covering

NZD/USD 
• NZD/USD extended north to a 4wk peak of 0.7346 during the European am
• Gains fuelled by rise in risk appetite on China President Xi’s speech
• Offers are touted at 0.7350 (just under March high)
• 0.7350 option expiry Wednesday, NZD 201mn strike
• AUD/NZD down to 1.0516 during the European am vs 1.0557 Asia high
• Bids expected near 1.0500: 1.0507 was Monday’s nine-month low
• McDermott to speak about inflation targeting in NZ Thursday (11am NZT)

FX OPTION 
• Risk sentiment improves after China president Xi speech overnight
• Most G10 vols stay heavy as ranges hold and dealers await US CPI Wed’s
• US CPI risk premiums tame – Next day EUR and JPY options 50 pips break-even
• USD/RUB vols gap higher as RUB extends losses – 1-month 16.3 from 9.5 prior
• Cable grinds higher, but still within range. 1-month now captures May MPC to prop

COMMENT
USD/RUB option hedges jump, 67 level eyed 
The liquidation of short positions as the sell-off in rouble assets extends has seen USD/RUB spike and those trying to hedge further spot volatility via options are having to pay through the roof for cover as implied vols follow suit. USD/RUB got to 63.92 today from 57.53 Friday, its biggest 2-day rally since early 2016 and highest level since December 2016. Implied vols have therefore spiked in a similar fashion, with 1-week trading as high as 25.0 from 15.0 vols earlier today and sub-10.0 levels Friday, which is 1.0% to 2.76% in premium terms. The benchmark 1-month implied vol straddle was paid to 16.3 from 13.0 with only a few levels trading between, highlighting the lack of liquidity and strong demand for cover (was 9.5 on Friday). In premium terms, the 1-month contract went from 2.15% to 3.72% premium. The implied vol premium for higher strikes versus lower strikes via the 1-month 25 delta risk reversal is now 4.5 from 2.5 vols. Dealers see scope to 67.00 with more shorts yet to liquidate.

EUR/USD may be set up for a fall after U.S. CPI 
EUR/USD has been rising this week but the rally may have set it up for a drop if U.S. CPI data beats forecasts on Wednesday and prompts markets to reprice Fed rate hikes. Having dipped as low as 1.7% yr/yr in 2017, U.S. core inflation is expected to rise to 2.1% in March. Inflation peaked at 2.3% in 2016 and was last higher than that in 2008. It is pushing sensitive highs despite a series of Fed hikes so potentially CPI is on the cusp of sparking a more hawkish Fed reaction, which could see the Fed hiking faster than markets anticipate. Fed funds only price 80bps of hikes between now and January 2020. At the same time euro zone data has taken a turn for the worse and if data in nearby Norway where inflation has dropped well below expectations after the c.bank cut its target serves a lead indicator for its neighbours, those betting on an ECB tightening-led euro rise are in big trouble.

RUB risks further falls with cbank unfazed for now
Russian assets are reeling from a new round of U.S. sanctions and the rapid pace of the rouble’s decline suggests the currency has further to drop with the central bank unfazed for now about what seems to be a correction of bullish excess. Last year’s carry trade theme sucked a lot of cash into high yielding but high risk emerging market currencies. Buyers of the rouble were encouraged to overextend themselves by the broader resilience of emerging markets to rising U.S. interest rates and stock markets. But, when a break comes the exit window in illiquid emerging markets is small and a the fast-paced USD/RUB rise is indicative of distressed positions, a classic short-squeeze. There are likely more RUB longs to chase yet and there’s lots of fuel from technicals to drive them out after a convincing bullish breakout from a two-year USD/RUB trading range. USD/RUB would have to trade 67.1862 just to fulfil a minimum technical correction of the 2016-18 rise.

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