FX Market Update 12-4

Market Briefs 
• EUR/USD -0.31%, USD/JPY 0.32%, GBP/USD -0.01%, EUR/GBP -0.29%
• DXY 0.26%, DAX 0.53%, FTSE 0.09%, Brent -0.37%, Gold -0.6%
• West weighs Syria attack that could lead to confrontation with Russia
• Global trade growth strong but at risk if spats escalate, WTO says
• Euro zone industrial output weaker than expected in Feb
• China says it will fight back if U.S. escalates trade spat
• Germany’s upswing faces headwinds from trade disputes – Economy Ministry
• UK parliament could block Brexit divorce bill – Brexit minister
• Keep Bank of England panels apart or risk errors – Broadbent
• UK lenders expect rebound in demand for mortgage lending in coming months – BoE
• BOJ upbeat on regional Japan but wary over labour shortage, trade risk
• Japan gov’t eyes new budget-balancing goal around mid-2020s – sources

Looking Ahead – Economic Data (GMT) 
• 12:30 U.S. Mar Import Prices MM, 0.2% f’cast, 0.4% prev
• 12:30 U.S. Mar Import Prices YY, 3.5% prev
• 12:30 U.S. Mar Export Prices MM, 0.2% f’cast, 0.2% prev
• 12:30 U.S. Mar Export Prices YY, 3.3% prev
• 12:30 U.S. w/e Initial Jobless Claims, 230k f’cast, 242k prev
• 12:30 U.S. w/e Jobless Claims 4-Wk Avg, 228.25k prev
• 12:30 U.S. w/e Continued Jobless Claims, 1.848 mln f’cast, 1.808 mln prev
• 12:30 CA Feb New Housing Price Index, 0.0% prev

Looking Ahead – Events, Other Releases (GMT) 
• 11:30 The European Central Bank publishes the accounts of the policy meeting of the Governing Council held on March 7-8 – Frankfurt
• 12:15 Participation by ECB Executive Board member Benoit Coeure in a panel discussion at a conference organised by CEPII – Paris
• 12:15 Bundesbank Panel discussion with Vice President of the Bundesbank Prof. Dr. Claudia Maria Buch at CEPII 40th Anniversary – Paris
• 14:00 U.S. House Ways and Means Committee holds hearing on effects of higher tariffs
• 15:00 U.S. Treasury announces 13- and 26-week bills (e: $48/42 bn)
• 15:00 U.S. Treasury announces 5-year TIPS (e: $16 bn)
• 15:00 Bundesbank speech by Executive Board of the Deutsche Bundesbank Dr. Andreas Dombret – Munich
• 15:30 Deputy Governor of Norges Bank Jon Nicolaisen speaks at the Norwegian Academy Of Science And Letters – Oslo
• 15:45 U.S. FedTrade 30-year Fannie Mae / Freddie Mac (max $690 mn)
• 16:00 Bundesbank speech by President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements, Dr. Jens Weidmann at XIII. Ludwig-Erhard-Lecture – Berlin
• 16:00 European Central Bank Vice President Vitor Constancio to attend Seminar with title “Systemic Risk Protection: Is the Picture Complete? Did We Over / Under Regulate?”. – Brussels
• 16:15 Jens Weidmann, Germany’s respresentative on the European Central Bank’s Governing Council, gives a lecture about the euro zone’s currency union – Berlin
• 16:55 ECB Vice President Vitor Constancio participates in the evening event hosted by the Systemic Risk Council, CFA Institute and CFA Society Belgium – Brussels
• 17:00 Treasury auctions $13 bn reopened 30-year bonds
• 20:00 New York Fed publishes tentative agency MBS operation schedule for period beginning April 13
• 21:00 FRB Minneapolis’s Kashkari participates in moderated Q&A session – Minneapolis, MN

Currency Summaries
EUR/USD 
• EUR/USD sliding after another set of poor data hits a market longer euro
• Traders bought in reaction to Nowotny’s talk of a rate hike
• Euro zone IP dropped 0.8% mm in Feb compared to 0.1% f/c
• Data adds to long run of dreary results that EUR/USD traders have ignored
• Pair needs to hold above 55/21-DMAS 1.2339/1.2318 to prevent a washout
• Below 200-HMA likely to see day tech traders turning short

USD/JPY 
• USD/JPY pivots 200HMA 106.78. 106.70-97 range Thurs with little to excite
• Bids touted in to 106.50, daily Tenkan is 106.57, weekly lows 106.65-62
• 21/30DMA 106.31 key support, break would open way to 02 April 105.66 low
• Falling daily cloud base and 55DMA 107.06/16 resistance
• Option markets still selling impled vols to profit from lack of spot volatility
• Sellers of strikes in broader 105-108 range, Implied vols lowest since January

GBP 
• Cable elicited support circa 1.4146 after half-cent fall during European am
• 1.4146 was Tuesday’s NY session low. 1.4173-1.4199 was Asia range
• Relatively safe-haven USD benefitting from expected military action in Syria
• EUR/GBP fell 20 pips from 0.8727 during European am: ECB minutes ahead
• BoE’s Broadbent says keep BoE MPC and FPC apart or risk errors
• Broadbent is one of the names in the frame to succeed Carney in July 2019

CHF
• EUR/CHF rose to threaten 1.1880 during the European am
• 1.1880 was Wednesday’s 39mth high. 1.1855 = early Europe low
• Speculation that rise to 1.1880 influenced by Sulzer-related flow
• Russian oligarch Vekselberg’s stake in Sulzer now less than 50%

USD/CAD 
• USD/CAD met headwind at 1.2615 after vaulting 1.2600 during European am
• 1.2600 was Wednesday’s NY afternoon high (after drop to 1.2545 8wk low)
• More offers expected near 1.2628 (200DMA). 1.2623 was Wednesday’s high

AUD/USD 
• AUD/USD elicited support at 0.7738 after falling from 0.7760
• 0.7738 was Tuesday’s Asian session high. 0.7760 = early Europe high
• Asia low was 0.7745 after failure to break 0.7773 (Wednesday’s 3wk high)
• Australian PM says foreign interference bill has soured ties with China

NZD/USD 
• NZD/USD extended north to an 8wk high of 0.7389 during the European am
• AUD/NZD slid to a new nine-month low of 1.0490 during the European am
• McDermott said new employment goal will support flexible inflation targeting

FX OPTION 
• G10 option vols stay heavy amid lack of spot volatility
• USD/JPY clings to 107.00 axis , pressing 1-month vol back to lows since Jan at 7.0
• EUR/USD long gamma from heavy vol sales and exotics keeps spot tight, vols low
• Cable vol demand falters with spot as key mid 1.42 bull levels left intact
• RUB vols retreat with spot but dip buyers look for more volatility and RUB weakness

COMMENT
USD/JPY drop to 100 might ease some of Trump’s angst 
A USD/JPY drop to the 100 level might be a welcome sideshow from the U.S/China trade spat for President Trump as he attempts to shrink America’s trade deficit. Japan’s former top currency diplomat Watanabe told Reuters last month that Japan could face criticism from Trump if USD/JPY rises to 115, a level most recently threatened in November. Comments from a senior BoJ official Thursday suggested Japan is fairly relaxed about recent yen gains: Kimihiro Eto, the BoJ’s Osaka branch manager, said many companies in the western Japan region of Kansai “won’t feel any pinch at dollar/yen levels around 105”. USD/JPY plumbed a 16-month low of 104.56 before Easter. Japan was one of the countries kept on a currency “monitoring list” by the last U.S. Treasury report outlining the currency practices of America’s major trading partners, which was published on Oct 17. The next semi-annual report is expected soon. USD/JPY was last at 100 in August 2016.

Japan investor bond sales could kick USD/JPY to 100
USD/JPY risks breaking the key 105 level and dropping to 99-100 if the recent trend of Japanese investors selling foreign bonds continues. Japanese investors sold 1.3 trillion yen ($12.17 billion) of foreign bonds between March 25 and April 7, according to recently published data. The new financial year in Japan usually sees funds with lots of new cash to invest selling the JPY to buy higher yielding foreign assets. This decidedly risk-averse twist to flows, which comes against a backdrop of possible trade wars and fresh geopolitical freshpoints over Syria, should support the JPY and could have a crucial impact as much of the expected USD/JPY support seen at the key 105 level is expected to be derived from Japanese buying related to offshore investments. Without Japanese buyers the risk of a break lower rises significantly. USD/JPY has been capped near the base of a thick daily Ichimoku cloud which is due to fall to 105.92 by May 1, making a close below the 200-MMA 105.56 likely and opening potential for 99-100 seen when USD/JPY last convincingly broke that point in 2016.

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