FX Market Update 26-4

Market Briefs

• EUR/USD 0.12%, USD/JPY -0.10%, GBP/USD 0.09%, EUR/GBP 0.03%
• DXY 0.01%, DAX 0.23%, FTSE 0.21%, Brent 0.70%, Gold -0.04%
• ECB expected to take confident tone despite slowing economy
• DE May GfK Consumer Sentiment, 10.8, 10.8% f’cast, 10.9% prev
• GB Mar UK Finance Mortgage Approvals, 37.567k, 38.120k prev, 38.035k rvsd
• GB Apr CBI Distributive Trades, -2, 5 f’cast, -8 prev
• British PM May feels more heat over EU’s customs union
• German economic growth to bounce back in second quarter – DIW
• Spain’s unemployment rate rises slightly in first quarter

Looking Ahead – Economic Data (GMT)
• 12:30 U.S. Initial Jobless Claims, 230k f’cast, 232k prev
• 12:30 U.S. Continued Jobless Claims, 1.850 mln f’cast, 1.863 mln prev
• 12:30 U.S. Jobless Claims 4-Wk Avg, 231.25k prev
• 12:30 U.S. Mar Durable Goods, 1.6% f’cast, 3.0% prev
• 12:30 U.S. Mar Durables Ex-Transport, 0.5% f’cast, 1.0% prev
• 12:30 U.S. Mar Durables Ex-Defence MM, 1.1% f’cast, 2.5% prev
• 12:30 U.S. Mar Wholesale Inventories Advance, 1.0% prev
• 12:30 U.S. Mar Retail Inventories Advance, 0.2% prev

Looking Ahead – Events, Other Releases (GMT)
• 11:45 ECB Governing Council meeting, followed by interest rate announcement – Frankfurt
• 12:30 ECB’s Mario Draghi holds a press conference after interest rate meeting – Frankfurt

Currency Summaries
• EUR/USD trading on hold ahead today’s ECB rate call and Draghi statement
• Pair matches the March 1 low at 1.2155 before basing ahead 1.2150 barriers
• Subsequently drifts back up to 1.2187 just below Asia’s 1.2188 peak
• Option pricing suggests a range close to 75 pips today
• EUR 5 billion vanilla option expiries at 1.2200 a big potential magnet
• Breaks 1.2150-1.2250 to meet support, resistance close by 1.2100/1.2300

• USD/JPY bulls remain on control as the wider 10-yr UST-JGB spread
• Spot has seen a 109.22-109.49 range so far this session
• Scope for further gains towards the 200-DMA at 110.27
• Daily cloud top comes in at 109.01, this should prop corrective moves
• Offers ahead of option KOs at 109.50, larger ahead of 110.00 may slow gains
• Note 109.65 is 50% Fibo of 114.43-104.56. 110.24 is 61.8% of 113.75-104.56

• GBP/USD fell to a six-week low of 1.3895 in early European trade
• Losses preceded Commons debate about EU’s customs union
• 1.3941 = high water-mark since 1.3895. Key resistance 1.40
• Cable met headwind pre-1.40 after Shire/Takeda M&A news Wednesday
• EUR/USD price action on ECB/Draghi will influence GBP/USD
• Risk of drop to 1.3866 (100DMA) will increase if EUR/USD swoons

• USD/CHF matches Wed’s 0.9848 high and the bid is holding
• Spot plays a tight 0.9818-0.9848 range early Europe
• UST yields coming easier, 10s at 3.0053% from Wed’s 3.0350% top
• EUR/CHF steady to firm and again watching spot for direction
• ECB decision not expected to rock the boat but some caution noted
• Cross plays 1.1950 to 1.1985 with a bid into New York

• USD/CAD rose from 1.2829 to a high of 1.2858 during the European am
• Offers expected near 1.2900 if the pair extends north
• 1.2897 was Wednesday’s three-week peak

• AUD/USD elicited fresh support ahead of 0.7550 during the European am
• 0.7553 was Thursday’s four-month low. 0.7581 = subsequent high
• RBA is expected to keep its cash rate at 1.5% next week (May 1)

• NZD/USD plumbed fractionally fresh 2018 low of 0.7056 during European am
• 0.7058 was Wednesday’s low. 0.7077 was Asia high

FX Options
• Buyers Friday EUR/USD vol, downside strikes, clearly concerned about ECB risk
• No change expected from ECB, but proximity of 1.2150 barriers a worry
• O/n USD/JPY at 10.5 vol or 48 pips suggests limited BoJ concerns
• Friday Cable break-even around 75 pips over UK GDP – will affect May hike odds
• 1-week vols capture May 2 FOMC but no added FX risk premium

UK PMIs to set tone for GBP pre-BoE verdict
Next week’s Markit/CIPS UK April PMI numbers will determine investor sentiment for sterling as they will provide final guidance ahead of the BoE interest rate verdict on May 10–which is currently seen as a coin toss between hike and hold. The manufacturing PMI leads on Tuesday, with the construction PMI following 24 hours later. The most important of the three PMIs, covering the service sector, is due May 3 (the service sector is the dominant segment of the UK economy). A trio of PMI beats would be positive for GBP and a welcome boost for hawks advocating a May 10 rate rise after the dovish shift in BoE expectations on Carney’s April 19 comments–which hit the pound. Ahead of the weekend, sterling may take a fresh hit if the first ONS estimate of UK Q1 GDP growth due on Friday at 0830GMT comes in lower than the 0.3% consensus expectation. Eleven out of the 41 respondents to a survey forecast 0.2% growth, with SEB tipping a meagre 0.1%. BOEWATCH:

Good news ignored, risk rerating, cash/bills favoured
A hallmark of the current earnings season is the way in which the market has ignored good news preferring to cut exposure especially to the FAANGs.

You only have to look at the price action on Netflix last week, Alphabet on Monday or Twitter yesterday to see the way in which sharp gains give way to sellers and a lower price. We will get another chance to view this in action when Microsoft, Amazon and Intel release their results today with Apple releasing its earnings on May 1.The way in which the market is approaching the earnings season suggests that the rerating of risk continues. The price action is a further indication of the way in which the market has shifted since the short vol blow-up in early February. It is also an indication that other potentially overstretched positions in the market are also at risk (Short bonds? Short dollar? Long oil?) as markets seek a more comfortable equilibrium in positioning. It remains attractive to hold a larger allocation in cash/bills that are offering an attractive return and more importantly the potential for less sleepless nights.

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