FX Market Update 13-4

Market Briefs
• EUR/USD 0.08%, USD/JPY 0.26%, GBP/USD 0.44%, EUR/GBP -0.35%
• DXY -0.05%, DAX 0.642%, FTSE -0.08%, Brent 0.37%, Gold 0.11%
• Trump weighs Syria options, Russia envoy says he ‘cannot exclude’ war
• Trump says U.S. will only rejoin Pacific trade pact if terms are improved
• Trump now less likely to sit for Mueller interview -sources
• CN Mar Trade Bal USD, -4.98 bln, 27.21 bln f’cast, 33.74 bln prev
• CN Mar Exports YY, -2.7%, +10.0% f’cast, +44.5% prev
• CN Mar Imports +14.4%, +10.0% f’cast, +6.3% prev
• HKMA intervenes as Hong Kong dollar hits weak end of trading band
• DE Mar CPI Final YY, +1.6%, +1.6% f’cast, +1.6% prev
• DE Mar HICP Final YY, +1.5%, +1.5% f’cast, +1.5% prev
• ES Mar CPI YY, +1.2%, +1.2% f’cast, +1.1% prev
• ES Mar HICP YY, +1.3%, +1.3% f’cast, +1.3% prev
• EZ Feb Eurostat Trade NSA EUR, 18.9 bln, 3.3 bln prev
• Japan’s economy likely stalled in Q1, but set to pick up again – Poll
• Oil heads for biggest weekly gain since July
• Gold on track for second weekly gain as Syria concerns linger

Looking Ahead – Economic Data (GMT) 
• 14:00 US Apr Univ of Michigan Consumer Sentiment Index prelim, 100.5 f’cast, 101.4 prev
• 14:00 US Apr Univ of Michigan Present Situation Index prelim, 120.0 f’cast, 121.2 prev
• 14:00 US Apr Univ of Michigan Expectations Index prelim, 88.1 f’cast, 88.8 prev
• 14:00 US Feb JOLTS job openings level, 6.173 mln f’cast, 6.312 mln prev

Looking Ahead – Events, Other Releases (GMT) 
• 11:30 US Fed’s Eric Rosengren speaks at Chamber of Commerce breakfast – Boston, MA
• 13:00 US Fed’s James Bullard speaks at university lecture series – St. Louis, MO
• 16:00 US Treasury releases Q2 Primary Dealer Meeting Agenda
• 17:00 US Fed’s Robert Kaplan participates in moderated Q&A session – Odessa, TX

Currency Summaries
EUR/USD 

• EUR/USD 1.2317-46 range contained by hedging for option expiries
• EUR 3bln vanilla options between 1.2300-50 roll off at 15GMT today
• EZ trade surplus EUR 18.9bln impact of higher euro modest for now
• German CPI confirmed 1.6% yy in March
• Support @ 200-HMA 1.2305. Resistance at April 12 high 1.2380

USD/JPY 
• USD/JPY buoyed by better risk, stocks – TPP optimism
• Breaks 107.52 – 50% of 110.48-104.56 for 107.68 but falters for now
• Thick cloud resistance to 109.32 where 100DMA lies, 108 barriers ahead
• Short gamma above barriers should improve volatility/potential gains above
• Support now seen at the cloud base and 55DMA 107.16/05

GBP 
• Tripped stops helped inflate cable to 11wk high of 1.4296 after 1.4250 vaulted
• Offers ahead of 1.4250 kept a lid on pair in Asia (and on Thursday)
• EUR/GBP slid to 11mth low of 0.8628 during the European am
• Rising expectations of Takeda bid for Shire positive for sterling
• GBP/JPY 151-154 past 24 hours. April flows are often kind to sterling too
• MUFG-Cable has risen every April for the past 13 years, by an average 2.3%

CHF
• EUR/CHF elicited fresh support near 1.1850 after retreating from 1.1879
• 1.1879 = early Europe high. 1.1850 was pullback low from 1.1888
• 1.1888 was Thursday’s 39mth high. 1.1880 was Wednesday’s high

USD/CAD 
• USD/CAD dropped to threaten 1.2545 ahead of the North American open
• 1.2545 was Wednesday’s eight-week low
• Recent CAD gains aided by higher oil prices
• Oil heading for biggest weekly gains since July
• Hopes of a NAFTA deal in May are also positive for CAD
• Rally from Wednesday’s high topped out near 200DMA, now at 1.2626

AUD/USD
• AUD/USD extended north to 4wk high of 0.7804 during the European am
• More shorts covered on break of 0.7780 (50% of Mar fall from 0.7916-0.7643)
• Shorts squeezed hard since 0.7650 support level held Monday
• Additional stops may be sheltering above 0.7815 (200DMA)
• AUD gains influenced by higher iron ore prices as risk appetite returns
• China to allow foreign investors to trade iron futures from May 4-regulator

NZD/USD
• NZD/USD rose to new 9wk high 5 pips shy of 0.7400 during the European am
• Recent kiwi gains aided by return of risk appetite
• 0.7437 (Jan/Feb high) among NZD/USD bull targets
• RBNZ has hired two external advisers on monetary policy, Paterson/Rolleston

FX OPTIONS
• GBP options at the fore as the pound makes fresh gains vs EUR and USD
• Mostly buyers of GBP calls, more so via long dated EUR/GBP risk reversals
• Vols elsewhere in G10 remain heavy amid better risk, yet familiar spot ranges
• EUR/USD and USD/JPY vols lowest since Jan as long gamma/range trade weighs
• Break of USD/JPY barriers 108.00 may yet excite vol market if breached
• Huge 3bln EUR/USD expiries 1.2300-60 today helping to contain there near term

COMMENT
GBP rise above 1.50 may curb BoE rate hikes
GBP looks set to rise to Brexit referendum peaks but its strength may start worrying BoE policymakers, curtailing the chance of further monetary policy tightening. Should GBP/USD close above the 200-WMA at 1.4245 today there is a high probability it will extend gains towards the June 24 high 2016 at 1.5022, but as traders bet bigger on BOE rate hikes they may find themselves losing the BOE’s support as they get longer. On a trade weighted basis GBP has risen 7.8% since August 2017 compared with the euro’s 9.49% gains since April 2017 which are worrying the ECB and may push a QE taper further out. It’s fair to assume the BOE will also be wondering if the strength of the UK’s currency is cause to hold off on further tightening and any rate rises aiding the pound’s rally will slam the brakes on the economy.So while the pound is making breaks that have scope for 1.5000 GBP/USD, 160 GBP/JPY and 0.8460 EUR/GBP, sterling traders should not only be thinking about locking in profits with those levels in mind but also getting short.

UK data dump to test sterling’s resilience
A raft of UK economic data, including inflation numbers, will test sterling bulls’ resilience next week. Earnings and jobs data are due on Tuesday at 0830GMT, with March inflation figures 24 hours later, in a reversal of the prior norm (when inflation statistics were published on Tuesdays and earnings/jobs data Wednesdays). Annualized earnings growth is forecast at 3.0% versus 2.8% previously, with the ex-bonus number expected at 2.8% from 2.6%. An earnings beat would be positive for GBP as it would underpin the consensus expectation of a 25bp BoE rate rise next month with scope for a follow-up hike in H2. Annualized CPI inflation is forecast at 2.7%, unchanged from February. Sterling could take a knee-jerk hit if CPI comes in below 2.7%, although a GBP-positive silver lining would be a widening of the spread of earnings growth over CPI (assuming no earnings decline). ONS March retail sales data is due Thursday, with a 0.1% decline on the month forecast.

Hedgers buy GBP vol but rest of G10 heavy
G10 vols remain heavy as broader spot ranges hold and the better risk environment pressures curves. However, GBP options have seen renewed demand today, most notably GBP call strikes versus the EUR and USD. EUR/GBP trades its lowest level since June 2017 and short dated risk reversals have regained a downside bias, while the long standing topside bias on 1 year and 2-year risk reversals takes a hit.

Cable vols meet demand, with 1-month attractive since rolling over the 10 May UK MPC meeting this week. Early buyers 10 May 1.4500 strikes today, with market growing more concerned about further potential GBP strength and the need to cover shorts, especially if we close above the 200 weekly MA at 1.4245 today.

EUR/USD lower since weak EZ IP and cautious ECB mins Thursday, but well entrenched by options to keep vols low and ranges tight.

USD/JPY pushing higher but needs to break 108 barriers to test short gamma and excite vols.

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