FX Market Update 11-4

Market Briefs
• EUR/USD 0.18%, USD/JPY -0.22%, GBP/USD 0.16%, EUR/GBP 0.02%
• DXY -0.09%, DAX -0.55%, FTSE -0.2%, Brent 0.46%, Gold 0.49%
• IMF chief optimistic on growth, but warns against trade protectionism
• GB Feb Industrial Output MM, 0.1%, 0.4% f’cast, 1.3% prev
• GB Feb Industrial Output YY, 2.2%, 2.9% f’cast, 1.6% prev, 1.2% r’vsd
• GB Feb Manufacturing Output MM, -0.2%, 0.2% f’cast, 0.1% prev, 0.0% r’vsd
• GB Feb Manufacturing Output YY, 2.5%, 3.3% f’cast, 2.7% prev, 2.2% r’vsd
• GB Feb Goods Trade Balance GBP, -10.20 bln, -11.95 bln f’cast, -12.33 bln prev, -12.23 bln r’vsd
• China pledges to allow more foreign investment in financial sector by year-end
• China March factory, consumer inflation slows in sign of ebbing economic growth
• Bank of France trims Q1 GDP growth estimate to 0.3 pct

Looking Ahead – Economic Data (GMT) 
• 11:00 U.S. w/e MBA Mortgage Application, -3.3% prev
• 11:00 U.S. w/e Mortgage Market Index, 388.1 prev
• 11:00 U.S. w/e MBA Purchase Index, 252.3 prev
• 11:00 U.S. w/e MBA 30-Yr Mortgage Rate, 4.69% prev
• 12:30 U.S. Mar Core CPI MM, SA, 0.2% f’cast, 0.2% prev
• 12:30 U.S. Mar Core CPI YY, NSA, 2.1% f’cast, 1.8% prev
• 12:30 U.S. Mar CPI Index, NSA, 249.576 f’cast, 248.991 prev
• 12:30 U.S. Mar Core CPI Index, SA, 255.75 prev
• 12:30 U.S. Mar CPI MM, SA, 0.0% f’cast, 0.2% prev
• 12:30 U.S. Mar CPI YY, NSA, 2.4% f’cast, 2.2% prev
• 12:30 U.S. Mar Weekly Earnings MM, 0.2% f’cast, 0.3% prev
• 14:00 U.S. Apr Atlanta Fed Business Inflation Expectations YY, 2.1% prev
• 15:00 U.S. Mar Cleveland Fed Median CPI MM, +0.2% prev
• 15:00 U.S. Mar Cleveland Fed Median CPI YY, +2.4% prev
• 18:00 U.S. Mar Federal Budget ($), -194.00 bln f’cast, -215.0 bln prev

Looking Ahead – Events, Other Releases (GMT) 
• N/A ECB Governing Council meeting. No interest rate announcements scheduled – Frankfurt
• 11:00 Speech by the ECB President Mario Draghi followed by a question and answer session with winners of the Generation €uro Students’ Award (G€SA), organised by the ECB – Frankfurt
• 13:00 – Participation by ECB Board member Pentti Hakkarainen in a panel discussion on “Risks of International Fragmentation” at the 2018 European Bank Executive Committee Forum organised by BNP Paribas – Brussels
• 14:40 Participation by ECB supervisor Ignazio Angeloni in a panel discussion on “The Future of Europe” at the 2018 European Bank Executive Committee Forum organised by BNP Paribas in Brussels, Belgium – Brussels
• 16:00 Swedish central bank deputy governor Cecilia Skingsley, talks about digital currencies – Stockholm
• 16:00 Swedish Central Bank Deputy Governor Cecilia Skingsley will describe the Riksbank’s inquiry into the so-called e-krona in light of the decreasing usage of banknotes and coins in Sweden – Stockholm
• 17:00 Treasury auctions $21 bn reopened 10-year notes
• 18:00 U.S. Federal Reserve’s Federal Open Market Committee (FOMC) will release minutes from its March 20-21 policy meeting – Washington, D.C.

Currency Summaries
EUR/USD 
• EUR/USD firmer since recent hawkish ECB speakers – most notable Nowotny Tue
• 1.2378 high Tue, extends to 1.2387 today but quickly faltered – EU CB sellers
• Offers pre 1.24, rate diffs still favour USD, EU growth yet to meet expectations
• Market long gamma from options, keeps ranges tight and pair sticky
• Support by todays 1.2351 low, daily cloud top 1.2328, 30/21DMA’s 1.2327/20
• Big option expiries nearby – 1.2345-60 on EUR 1.8bln, another 1.8bln 1.2300-25
• US CPI and FOMC minutes today, but options pricing just 50 pips risk premium

USD/JPY 
• 1.5bln 107.00-10 expiries help tether USD/JPY, 1bln 107.50 above
• 107.25-106.90 range . Resistance 107.16-109.32 daily cloud, Offers by 107.50
• Tues high 107.40, Fri/Thurs highs 107.46/49. 107.52 is 50% of 110.48-104.56
• 106.62 Tues/Mon lows underpin. Needs big US CPI surprise to excite
• O/n next day expiry options pricing just 46 pips break-even however
• Implied volatility curve trading low end of 2018 range

GBP 
• Cable tripped stops above 1.4200 in early European trade, en route to 1.4223
• 1.4223 = 15-day top. 1.4182 = ensuing low on weak UK mfg/construction data
• US Mar inflation data due 1230GMT: CPI f/c +2.4% YY, core CPI f/c +2.1% YY
• Weaker than expected US CPI could inflate GBP/USD towards 1.4250
• Offers near 1.4250 capped pair last month (1.4242/44 = Mar 26/27 highs)
• EUR/GBP rose to threaten 0.8728 (Tuesday high) on weak UK data

CHF
• EUR/CHF shorts squeezed during early Europe surge from 1.1825 to 1.1880
• 1.1880 marks high since 1.20 floor was unexpectedly scrapped in Jan 2015
• Speculators may be increasingly tempted to go short if cross extends north
• Stops on any such short positions likely to be pegged above 1.2000

USD/CAD 
• USD/CAD held above 1.2588 in Asia amid talk of profit-taking on shorts
• 1.2588 was 7wk low Tuesday after rise in risk appetite on Xi speech
• CAD has also benefitted from hopes of NAFTA deal in May and higher oil
• 1.2618 was European am high. 1.2630 (200DMA) resistance beyond

AUD/USD 
• AUD/USD based a pip shy of 0.7739 after retreating from 0.7769
• 0.7739 was Tuesday’s European am high. 0.7769 was Asia high
• Shorts squeezed during recent rise from 0.7652 (Monday’s low)
• Resistance levels beyond 0.7769 include 0.7788 (100DMA) and 0.78

NZD/USD 
• NZD/USD retreated to 0.7347 after threatening 0.7376 in Asia
• 0.7376 was Tuesday’s 6wk high after rise in risk appetite on Xi speech
• McDermoot speech on inflation targeting in NZ in pipeline (11am NZT)

FX OPTION 
• EUR/USD: 1.2300 (1BLN), 1.2320-25 (800M), 1.2345-60 (1.8BLN)
• USD/CHF: 0.9480 (550M). GBP/USD: 1.4045 (200M), 1.4150 (451M)
• AUD/USD: 0.7695-0.7700 (326M). AUD/JPY: 81.60 (275M)
• USD/JPY: 106.00-25 (1.6BLN), 106.50-65 (1.4BLN), 107.00-10 (1.5BLN), 107.50 (1BLN)

COMMENT
EUR/USD remains vulnerable to US rates and euro zone growth 
Recent hawkish comments from some ECB members have propped up EUR/USD but it remains vulnerable to rising U.S. interest rates and potentially weakening euro zone growth. Recent economic growth figures from the euro zone remain tame and if forthcoming data does not live up to expectations, it has the potential to knock the euro back down. Interest rate differentials remain a key factor in the short-term, with the U.S. set to hike at least twice more in 2018, while the timing of any rate move from the ECB remains vague. For now at least however, EUR/USD looks set to hold the broader 1.21-1.26 range which has been containing the pair since the start of the year. The options market continues to sell strikes at both ends of the range and volatility more broadly, which has only been tightening the grip on the pair in recent days. Near-term focus is today’s U.S. CPI data and FOMC minutes, but the tame risk premiums suggest markets are not looking for any surprises.

EUR/CHF could rally to 1.20 ahead of ECB meeting
The probability of EUR/CHF threatening its former 1.20 floor level before the next ECB monetary policy meeting on April 26 is rising as the cross extends a rally that has left many in the market puzzled. EUR/CHF has risen by a big figure over the past 24 hours, with shorts squeezed during Wednesday’s early Europe surge from 1.1825 to 1.1880. The latter level marks the high for EUR/CHF since its 1.20 floor was unexpectedly scrapped in January 2015. There is much head-scratching about Wednesday’s surge, which is somewhat counterintuitive given the possible launch of air strikes into Syria in the next 72 hours. Air strikes might typically increase the attraction of the safe-haven Swiss franc. Speculators who have not been burned by the cross’ rise may be increasingly tempted to go short EUR/CHF if it nears 1.20, with stops pegged above 1.20. The SNB could drop its description of the CHF as being “highly valued” if EUR/CHF is above 1.20 when the SNB meets in June

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