FX Market Update 18-4

Market Briefs

• EUR/USD 0.07%, USD/JPY 0.19%, GBP/USD -0.56%, EUR/GBP 0.61%
• DXY 0.08%, DAX 0.07%, FTSE 0.88%, Brent 1.15%, Gold 0.17%
• South Korea says discussing peace deal with N.Korea ahead of summit
• Strong China Q1 GDP growth supported by construction, manufacturing, hi-tech
• Inflation-busting pay hikes highlight German shift towards consumption
• Italy president summons senate speaker to break deadlock over new govt
• EZ Mar HICP Final MM, 1.0%, 1.0% f’cast, 0.2% prev
• EZ Mar HICP Final YY, 1.3%, 1.4% f’cast, 1.4% prev
• EZ Mar HICP exF&E YY, 1.3%, 1.3% f’cast, 1.3% prev
• May rate rise less certain after UK inflation cools to one-year low
• GB Mar CPI YY, 2.5%, 2.7% f’cast, 2.7% prev
• GB Mar Core CPI YY, 2.3%, 2.5% f’cast, 2.4% prev
• GB Mar RPI YY, 3.3%, 3.6% f’cast, 3.6% prev
• GB Mar PPI Core Output YY NSA, 2.2%, 2.2% f’cast, 2.4% prev, 2.5% rvsd
• GB Mar PPI Core Output MM NSA, 0.1%, 0.2% f’cast, 0.2% prev, 0.3% rvsd

Looking Ahead – Economic Data (GMT) 
• 11:00 U.S. MBA Mortage Applications, -1.9% prev
• 11:00 U.S. Mortgage Market Index, 380.6 prev
• 11:00 U.S. MBA Purchase Index, 247.3 prev
• 11:00 U.S. Mortgage Refinance Index, 1,110.8 prev
• 14:00 CA BoC Rate Decision, 1.25% f’cast, 1.25% prev

Looking Ahead – Events, Other Releases (GMT) 
• 14:00 Bank of Canada policy interest rate announcement and monetary policy report – Ottawa
• 15:15 BoC’s Stephen Poloz and Carolyn Wilkins hold press meet on Monetary Policy Report – Ottawa
• 18:00 U.S. Federal Reserve issues Beige Book on economic condition – Washington
• 19:00 CBO Director Hall testifies on the budget outlook before House subcommittee
• 19:15 FRB New York’s Dudley speaks on the State of the Economy – New York
• 20:00 Fed’s Quarles speaks on trans-Atlantic regulatory reform – Washington

Currency Summaries
EUR/USD 

• Euro zone final HICP 1.3% yy from 1.4% and compared to 1.4% f/c
• EUR/USD trades tight 1.2342-1.2382 range close mid-point of moves since Jan
• Well trodden ground saturated with options which are anchoring spot
• EUR 2 billion of vanilla expiries 1.2300-1.2400 today
• No U.S. data today. Fed Beige Book @ 18GMT. Dudley and Quarles speaking

USD/JPY
• USD/JPY bulls are boosted as the daily cloud base props market
• Spot has seen a modest 107.00-107.39 range so far this session
• The market was better bid in Asia due to Tokyo fix demand and risk-on feel
• Market still seen has heavy from @107.50 which might stymied further gains
• Japanese exporters, other offers said to be from 107.50 and above
• Vice Fin Min Fukuda to quit after allegations of harassment – Reuters
• March trade surplus Y797.3 bln, Y498.3 bln eyed.
• Imports -0.6% y/y, +5.4% eyed; exports +2.1%, +4.7% eyed, total vol down.
• Exports to US +0.2% y/y, to Asia +4.5%, to China +10.8%, rebound post-LNY.
• March crude oil import volume -5.1% y/y, LNG -2.6%, thermal coal +2.6%

GBP 
• Cable slid to 1.4173 after more GBP longs jettisoned on sub-f/c 2.5% UK CPI
• 1.4173 = six-day low. 1.4267 was low before 0830GMT data release
• Prior liquidation of GBP longs after Tuesday’s UK earnings miss
• Morgan Stanley FX positioning tracker had GBP longs largest in G10
• IMM speculators net GBP long position biggest since July 2014
• EUR/GBP up to 0.8721 on sub-f/c UK CPI vs 11mth low of 0.8621 Tuesday

CHF
• Looks like only a matter of when not if EUR/CHF tests the 1.20 level
• Early Wed high of 1.1982 as diverging CB policy cancels out CHF haven attraction
• SNB ultra-dovish stance vs hints of ECB normalization underpinning the cross
• Talk of offers ahead of the former 1.20 SNB floor and profit taking likely to stall current run
• USD/CHF off its early Wed 0.9699 three-month high but is holding Tues’s 200DMA break
• 200DMA supports at 0.9657 and previous 0.9650, Apr 6, high point just behind

USD/CAD
• USD/CAD extended north from 1.2528 to threaten 1.26 during European am
• Huge 1.2600 option expiry for 10am ET NY cut, USD 2bln strike
• 1.2528 was Tuesday’s 2mth low. BoC seen on hold at 10am ET
• CAD will rise if the BoC unexpectedly raises rates
• Unchanged + relatively dovish message could spur 1.2622 test/break
• 1.2622 is 200DMA. Offers pre-200DMA capped pair Apr 11-13 and Monday

AUD/USD 
• AUD/USD fell to a six-day low of 0.7745 in early European trade
• 0.7738/40 (Apr 11/12 low) is a support window
• Resistance levels 0.7777 (Asia high), 0.7796 (100DMA) and 0.7817
• 0.7817 = 200DMA (offers pre-200DMA capped Apr 13 rise)
• Australian March jobs data due 9.30pm ET: employment f/c +21k

NZD/USD 
• NZD/USD extended south to test 0.7304 during the European am
• 0.7304 was Apr 10 low. 0.7327 was Tuesday’s low (respected in Asia)
• NZ Q1 inflation data due 6.45pm ET: +1.1% YY f/c vs +1.6% YY in Q4

FX OPTIONS
• GBP vol longs rewarded, Cable moves cover 1-month vol break-even
• GBP topside longs yet to bail, but short date downside strikes readopt vol premium
• EUR/USD and USD/JPY vols at lows since January amid stangant spot
• More range trading expected ahead of ECB and BoJ next week
• USD/CAD O/n vol break even 85 pips over BoC. 3bln 1.2585-1.26 expiries

COMMENT
Glass half-full view solace for bruised GBP bulls
Sterling has been hit hard by March’s softer than expected 2.5% UK CPI inflation number but bruised GBP bulls have consolation in the shape of an expected widening of the spread of UK earnings over CPI next month. This spread could be used by MPC hawks to justify voting for a BoE rate hike on May 10. The latest quarterly annualized average earnings growth number came in 0.1% higher than February’s CPI inflation number, having been 0.2% below it in January. Cable scaled a post-Brexit referendum day high of 1.4377 before Tuesday’s earnings number–which prompted the liquidation of GBP longs as it was lower than expected. Further GBP position adjustments since the sub-forecast UK CPI number have deflated GBP/USD to a six-day low of 1.4173 and lifted EUR/GBP to 0.8721–a penny above Tuesday’s 11-month low. Morgan Stanley’s FX positioning tracker had GBP longs largest in G10 with IMM speculators net GBP long position the biggest since July 2014. BOEWATCH:

EUR/CHF faces 1.20 test on diverging policy views
EUR/CHF reached 1.1980 early Wednesday and is closing in fast on the former 1.20 Swiss National Bank floor, which was dropped three-years ago, as ECB and SNB policy views diverge. A full retracement is on the cards of the sharp 1.2039 to 0.8500 slide that followed the removal of the floor in January 2015. The cross has risen 4.5% since early February and given the SNB’s ultra-loose policy stance, there’s scope for further gains. Geopolitical risks usually see flows into the CHF but since February the main driver has been monetary policy divergence. While the ECB hints at policy normalization and the U.S. and UK line up rate hikes, the SNB has stuck to its dovish stance. SNB chairman Thomas Jordan said last weekend that an exit from ultra-loose policy remains off the agenda. However, there is a sense the market might be over playing the ECB normalization card and as such EUR/CHF gains above 1.20 may be limited by profit-taking

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