FX Market Update 25-4

 Market Briefs

• EUR/USD -0.14%, USD/JPY 0.20%, GBP/USD -0.09%, EUR/GBP -0.07%
• DXY 0.21%, DAX -1.55%, FTSE -0.69%, Brent -0.03%, Gold -0.49%
• The dollar hit a four-month high after U.S. benchmark Treasury yields rose above 3%
• France to consider curbs on credit growth in June – central bank chief
• French central bank urges liquidity stress tests for funds
• French jobless total falls during the first quarter
• FR Apr Consumer Confidence, 101, 100 f’cast, 100 prev
• German government cuts 2018 growth forecast to 2.3 percent
• China unveils fresh measures to boost rental housing, pave way for REITs

Looking Ahead – Economic Data (GMT) 
• 11:00 U.S. MBA Mortgage Applications, 4.9% prev
• 11:00 U.S. Mortgage Market Index, 399.4 prev
• 11:00 U.S. MBA Purchase Index, 262.4 prev
• 11:00 U.S. MBA 30-Yr Mortgage Rate, 4.66% prev
• 11:00 U.S. Mortgage Refinance Index, 1,149.5 prev

Looking Ahead – Events, Other Releases (GMT) 
• 20:15 BoC’s Stephen Poloz and Carolyn Wilkins participate in Senate Standing Committee – Ottawa

Currency Summaries
• EUR/USD 1.2188-1.2238 in Asia and 1.2187/18 in Europe
• Pair trapped by hedging for EUR 1.7bln option expiries 1.2200-20 today
• Aside options, interest to trade suppressed by event risk with ECB tomorrow
• Support @ Mar 1 low 1.2155. Resistance @ cloud top 1.2341/Apr 24 high 1.2345

• USD/JPY has seen a 108.79-109.27 range so far on Wednesday
• Month-end demand and the widening 10-yr UST-JGB spread fuels USD/JPY bulls
• Rising 10-year UST yield has resulted in a widening of the UST-JGB spread
• USD set for more gains as 10-year UST yield underpins
• Limited BoJ expectations leaves rates to guide USD/JPY

• Cable met headwind pre-1.40 after eliciting M&A news boost in Asia
• Shire willing to back $64bln Takeda bid. 1.40 is a former support level
• 1.3934 is low water-mark (during European am) since 1.40 threatened
• Tuesday’s range was 1.3919-1.3987 (1.3919 = five-week low)
• Recent GBP losses spurred by dovish shift in BoE expectations on Carney
• May 10 BoE monetary policy announcement is coin toss between hike/hold

• All about higher U.S. yields and CB policy divergence
• USD/CHF rises to another new high of 0.9826 as 10-yr UST ylds hit 3.0090%
• Techs remain o/b with pullback risk but pullbacks likely limited
• EUR/CHF extends rebound out of Monday’s 1.1927 pullback low: 1.1997 Wed high
• Expect offers to emerge again around the 1.20 former SNB floor
• However, if U.S. yields continue higher a good chance the 1.2039 Jan 2015 high is met

• USD/CAD extended north to 3wk high of 1.2868 in early European trade
• Greenback gains influenced by further rise in UST yields: 10yr above 3%
• Offers may emerge near 1.2900 if USD/CAD extends north
• 1.2896 is 61.8% of 1.3124 (March 19 high) to 1.2528 (Apr 17 low)

• AUD/USD extended south to fresh 4mth low of 0.7563 in early European trade
• Decline influenced by further rise in UST yields: 10-year north of 3%
• AUD/USD offers expected near 0.7600 and 0.7620 (Tuesday’s high)
• Large 0.7600 option expiry Thursday, AUD 567mn strike

• NZD/USD extended south to test 0.7073 in early European trade
• 0.7073 = 2018 low (Jan 4). 0.7106 was Tuesday’s low
• USD supported by rise in UST yields: 10-year north of 3%

FX Options
• EUR/USD 5bln 1.22 expiries Wed/Thurs dominate price action in to ECB
• EUR vols stay bid, downside sought, clearly fears of deeper spot declines
• USD/JPY topside progress falters, vol longs book profits after recent gains
• Cable vols stay firm after recent volatility and impending GDP Friday
• Tame Implied vol premums for ECB and BoJ suggest limited expectations
• Bigger US yield and USD gains needed to maintain broader G10 vol demand

Japan’s unhedged investments pose risk for USD/JPY
The emergence of risky investment strategies from Japan’s usually conservative insurance sector poses significant downside risk for USD/JPY should the pair break lower. Japan’s life companies are planning to buy more foreign assets without hedges which should initially shore up USD/JPY support. However, life inurers face an opposing force with the JPY demand generated by the nation’s exporters generating significant USD/JPY resistance. It’s hard to say who may break first and a 105-110 range may be a good bet for the mid-term, yet should the break come lower it will have major ramifications for JPY and Nikkei. Life insurers think the cost of hedging has grown too big so plan to buy fewer hedged assets but should USD/JPY buck their outlook and break in accord with the downtrend since November (50% November-March drop is 109.65), they will incur losses that will hit earnings. That will hit the Nikkei, fuel risk aversion and a bid for the JPY, and could result in a similar JPY surge to that which followed the implosion of carry trades in 2007. USD/JPY and Nikkei

USD/ZAR carving out uptrend as U.S. yields rise
USD/ZAR made a convincing break higher early on Wednesday to a 16-week high of 12.4300 and though there are some overbought indications on the daily chart, ZAR will remain on the defensive as long as U.S. yields are rising. The 10-year UST yield hit a near 4-year high of 3.009% earlier in the session and this looks to have given USD/ZAR another leg up. Key support is now at the former range top at 12.1575. A 38.2% Fibo retrace level taken off the November to February 21% drop provides a target at 12.6805 and if a new bull trend takes off, the retrace could extend to the 50% level at 13.0425. However, with little top tier data scheduled for South Africa and States, Wednesday could see profit- taking stall the dollar’s run in the high 12.40s but fresh bidding will hold pullbacks around 12.35. A nationwide one-day strike by left-wing SAFTU could lean on the ZAR but so far there’s little evidence of major impact


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