FX Market Update 19-4

Market Briefs

• EUR/USD -0.05%, USD/JPY 0.16%, GBP/USD -0.08%, EUR/GBP 0.02%
• DXY 0.06%, DAX -0.03%, FTSE 0.29%, Brent 0.64%, Gold -0.14%
• Currency trading volumes hit record highs in first quarter
• Japan contemplates post-Abe world, but rivals’ positions still murky
• Trump, Japan’s Abe agree to intensify trade talks
• China says ready to deal with any fallout from U.S. trade row
• Moody’s says Russian economy resilient to latest U.S. sanctions
• BOJ warns of risk from lax bank loans to “middle risk companies”
• EZ Feb Current Account SA, EUR, 35.1 bln, 37.6 bln prev, 39.0 bln rvsd
• EZ Feb Current Account NSA, EUR, 22.7 bln, 12.8 bln prev, 12.6 bln rvsd
• GB Mar Retail Sales YY, 1.1%, 2.0% f’cast, 1.5% prev
• GB Mar Retail Sales Ex-Fuel YY, 1.1%, 1.4% f’cast, 1.1% prev, 1.2% rvsd
• GB Mar Retail Sales MM, -1.2%, -0.5% f’cast, 0.8% prev

Looking Ahead – Economic Data (GMT)
• 12:30 U.S. Initial Jobless Claims, 230k f’cast, 233k prev
• 12:30 U.S. Continued Jobless Claims, 1.848 mln f’cast, 1.871 mln prev
• 12:30 U.S. Jobless Claims 4-Wk Avg, 230.00k prev

Looking Ahead – Events, Other Releases (GMT)
• 12:00 FRB’s Lael Brainard speaks on “Regulatory Reform” – Washington
• 12:45 IMF’s Christine Lagarde holds news conference before IMF-World Bank meeting – Washington
• 13:30 FRB’s Randal Quarles testifies before the Senate Banking Committee hearing – Washington
• 14:45 FedTrade Operation 30-year Ginnie Mae (max $465 mn)
• 15:00 ECB’s Ignazio Angeloni speaks at European Breakfast series – Washington
• 16:00 Norges Bank’s Oystein Olsen speaks for the financial markets association – Oslo
• 16:30 BoE’s Jon Cunliffe speaks at 2nd Annual Global Finance Forum – London
• 16:30 Eurogroup head Mario Centeno speaks on “Completing the European Project” – Washington
• 17:15 Norges Bank’s Jon Nicolaisen speaks at 36th Annual Monetary and Trade Conference – Philadelphia
• 18:45 BoC’s Carolyn A. Wilkins participates in panel discussion at IMF – Washington
• 22:00 Swedish cenbank’s Stefan Ingves and Per Jansson attend IMF-World Bank event – Washington
• 22:45 Cleveland Fed’s Loretta Mester speaks on outlook and policy at Univ of Pittsburgh – Pittsburgh

Currency Summaries
EUR/USD
• EUR/USD boosted to 1.2400 on MNSI story about Jun’s importance for ECB
• Source says ECB will give more clarity on forward guidance in June
• Adds if financial conditions deteriorate could boost bond buys
• EUR/USD slips back to a session low 1.2354
• EUR 6 billion of vanilla expiries between 1.2300 and 1.2400 today
• Huge size and likely active hedging of options are anchoring EUR/USD
• EZ c/a narrows from EUR 39bln in Jan to EUR 35.1bln in Feb

USD/JPY 
• Abe-Trump summit non-event, worst fears on trade put aside for now
• Outlook bullish, but U.S-China option protection needed
• Focus on matching 107.78 Feb 22/Apr 13 highs, stops 107.80+, 108.00+
• Session 107.19-107.52 range, spot stymied by Japanese exporter offers so far
• Spot remains propped by thick daily cloud, expect gains
• Decent support at 107.00 which was the low on Wednesday

GBP
• Cable fell to 1.4161 as more longs headed for exit on sub-f/c UK retail sales
• Retail sales fell 1.2% in March against an expected decline of 0.5%
• Prior GBP position adjustments on UK earnings miss and sub-f/c UK CPI
• 1.4161 = one-week low, 48 hours after post-Brexit vote day high of 1.4377
• Rise to 1.4377 influenced by hawkish BoE expectations pre-UK earnings miss
• EUR/GBP extended north to 8-day high of 0.8735 during the European am

CHF
• EUR/CHF again stalled by profit taking ahead of the 1.20 level
• Cross plays 1.1976-1.1997 early Thurs: 1.20 test expected but patience needed
• Former SNB floor attracting offers but l/t 1.20+ objectives debated
• 50% Fibo Oct 2007 1.6828 high-Jan 2015 0.8500 low comes at 1.2664
• USD/CHF squeeze above the 200DMA, 0.9657, helping underpin the cross

USD/CAD
• USD/CAD elicited support pre-1.2600 after falling from 1.2645 (Asia high)
• 1.2606 = European am low. 1.2600 option expiry for NY cut, USD 415mn strike
• Larger 1.2600 option expiry Friday, USD 1.3bln strike
• 1.2660 was eight-day high Wednesday after BoC’s dovish hold
• Poloz-Recovering from NAFTA uncertainty could take time (WSJ interview)

AUD/USD
• Offers pre-0.7817 (200DMA) curtailed AUD/USD rise from 0.7765
• Prior supply ahead of 200DMA also capped pair last Friday (Apr 13)
• 0.7765 was low after soft Australia employment data
• More shorts squeezed during AUD/NZD rise to 1.0664 (3wk high)

NZD/USD
• NZD/USD dropped to threaten 0.7300 again during the European am
• 0.7304 was Wednesday’s low and the Apr 10 low
• NZD weakness influenced by dovish comments from RBNZ governor Orr
• Orr said he expected “very benign inflation going forward without doubt”
• RBNZ Governor spoke to Radio New Zealand after 1.1% NZ CPI number

Option Expiries for Thursday NY cut
• EUR/USD: 1.2300-10 (2B), 1.2315-25 (1.3B), 1.2350-60 (1.1B), 1.2400 (1.6B)
• USD/CHF: 0.9530 (226M), 0.9650 (251M)
• GBP/USD: 1.4075-90 (545M), 1.4255 (256M), 1.4300 (232M), 1.4350 (295M)
• EUR/GBP: 0.8580 (475M), 0.8630 (233M), 0.8650 (419M), 0.8700-20 (671M)
• AUD/USD: 0.7700-10 (1.9B), NZD/USD: 0.7225 (210M), USD/CAD: 1.2600 (380M)
• USD/JPY: 106.50 (695M), 107.00 (342M), 107.60 (340M), 108.00 (525M)

COMMENT
EUR/CHF longer-term bull objectives up for debate 
Overbought technicals that have developed as EUR/CHF has rallied are warning that the cross’ gains above 1.20 may be limited, initially, but there’s much debate about the likely longer-term objective once the former SNB floor buckles. A long-term 50% Fibo off the October 2007 1.6828 high and January 2015 0.8500 low comes at 1.2664 and provides a viable bull target for 2018. SNB intervention, which has been keeping the CHF soft, is now likely over but at the same time the central bank is unlikely to spoil the EUR/CHF rally with restrictions. Expect profit-taking on EUR/CHF longs once the 1.20 level trades. There’s possible scope to the 1.2039 January 2015 sell-off point before stalling but pullbacks will probably be limited as fresh positioning underpins. Monetary policy divergence between the SNB and ECB will likely keep EUR/CHF inflated for the remainder of 2018. Keep an eye on a bid USD/CHF too as the spot market squeeze above the 0.9657 200-DMA helps underpin the cross. EUR/CHF

Central Bank flows may turn the USD higher
Shifting central bank flows are set to underpin a much weakened U.S. dollar and with other volumes low, and traders heavily short, CBs could even turn the greenback onto a higher path. With EUR/CHF at 1.2000 the chance of further SNB intervention seems remote, removing a prior key support for the euro. China’s tolerance of a stronger yuan suggests that it too will not be building reserves supporting USD/CNY, while logically CNY’s rise on a trade weighted basis will weigh on big components of the basket like euro and yen. India, Indonesia and HKMA have been selling dollars (HK USD 6.5 bln) and any rebalancing of reserves will see dollars purchased versus liquid currencies like euro and JPY. Other interests in FX have waned with vols the lowest since early January, so CB flows, which are large anyway, may have a big influence. With specs sitting short of 27 billion dollars, (mostly versus euro), CB flows that will initially support the dollar could spark a change in its fortunes.

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