FX Market Update 22-5

Market Briefs

Bank of England’s Carney says his message on rates isn’t misunderstood
Bank of England’s Vlieghe says he sees more rate hikes than market did
EU’s Malmstrom says thinks U.S. considers EU trade proposal insufficient
Euro zone underlying inflation needs time to rise: Liikanen
German economy still booming but has lost some momentum – Bundesbank
China slashes auto import tariffs in boost to BMW, Tesla
Spain economy seen growing in Q2 at similar rate to Q1
Kuroda says BOJ will signal exit plan if prices pick up, warns of risks
Foreign media arrive in North Korea, suggesting nuclear shutdown on track
German firms can’t be totally shielded from U.S. Iran move -minister

Looking Ahead – Economic Data (GMT)

12:30 CA Wholesale Trade MM, 0.6% f’cast, -0.8% prev
12:55 US Redbook MM, 0.8% prev
12:55 US Redbook YY, 4.9% prev
14:00 US Rich Fed Comp. Index, -3 prev
14:00 US Rich Fed, Services Index, 2 prev
14:00 US Rich Fed Mfg Shipments, -8 prev

Looking Ahead – Events, Other Releases (GMT)

No major events scheduled

Currency Summaries

EUR/USD boosted 1.1757-1.1830 as Italian bond yields tumble
Italy 10-year yield down 9bp on the day
New Italy Govt may find EU obstacles to its spending plans too high
Good offers tipped 1.1840, 200-HMA @ 1.1851 and EUR 1.1bln expiries 1.1850
Break over 1.1850 risks stops and run to 21-DMA @ 1.1945
Monday’s 1.1717 low, key fib at 1.1710 underpin, break risks 1.1450-1.1550

USD/JPY’s scope for gains to retest Jan 18 111.48 high and the 111.50 level
Market still heavy at 111.50 where presumed option barriers are situated
10-yr UST-JGB narrowing stops, correlation with spot above +0.5 nL2N1SR0EU
Bulls in driving seat but huge TL from 2015 may cap gains nL2N1ST06T
Bidding interest trails down to 110.80, recall 110.82 was Monday’s low
USD/JPY has seen a relatively narrow 110.84-111.18 range this session

Cable extended north from 1.3413 to threaten 1.35 on hawkish Vlieghe steer
Vlieghe said he expects slightly more BoE hikes next 3 years than market did
1.3413 was early Europe low, before some profit-taking on USD longs
1.3500 = 10DMA. Mooted offers near 1.3528 are appreciation obstacle beyond
1.3528 was last Friday’s high–before drop to Monday’s 2018 low of 1.3392
GE risk influenced drop to 1.3392. Express-Boris rules out snap election

EUR/CHF looks to be playing out a hammer reversal
Bull signal given Mon and confirmation so far Tues
Cross plays 1.1737-1.1771 from Mon’s 1.1708 low
Improved risk sentiment taking the edge off the CHF
USD/CHF steady to lower bias within tight intraday ranges
Spot plays 0.9945-0.9990 and is offered into New York
SNB sight depos, domestic fall and total rises

USD/CAD extended south to test 1.2749 during the European am
1.2749 was last Thursday’s low–before rise to 1.2911 pre-weekend high
CAD benefitting from higher oil prices: WTI up to $72.72 during European am
$72.72 = high since Nov 2014. 1.2730 (May 11 low) is additional support level

AUD/USD extended north to a 4wk high of 0.7605 during the European am
0.7595 was Asia high. AUD gains aided by positive US/China trade news
US/China nearing deal to remove US sales ban against ZTE-Reuters sources
Lowe to speak about Australia’s deepening relationship with China Weds

NZD/USD extended north to threaten 0.6975 during the European am
0.6975 was last week’s high (May 14). 0.6958 was Asia high
Monday’s low was 0.6885, after disappointing NZ retail sales data

FX option expiries Tuesday May 22
EUR/USD: 1.1700-25 (1.7BLN), 1.1750 (525M), 1.1785-1.1800 (1BLN)
1.1800 (426M), 1.1850 (1.1BLN), 1.1870-75 (675M), 1.1900 (1.6BLN)
EUR/GBP: 0.8770 (321M). EUR/NOK: 9.5800 (671M)
AUD/USD: 0.7470 (1.3BLN), 0.7540 (407), 0.7560 (330M)
USD/CAD: 1.2650-70 (320M), 1.3000 (401M). EUR/JPY: 130.40-50 (1BLN)
USD/JPY: 110.00 (830M), 110.25 (1.1BLN), 111.00 (601M)


USD running out steam as UST yields peak

The dollar rally looks to be running out of steam as U.S. Treasury yields peak, with the DXY stalling ahead of key resistance around 94.20 Monday, falling back to 93.41 so far Tuesday. The 94.20 level was the 38.2% Fibo retrace of the 2017-18 fall, 94.22 the high seen in December 2017, so a natural area for dollar longs to book profits. EUR/USD also ran into strong demand from those leaning against the well-touted and sizeable 1.1700 barriers, regaining 1.1800 early Tuesday. U.S. Treasury yields have peaked, with the bench-mark 10-year back to 3.05 from new multi-year high at 3.128 Thursday. Developments from here will determine whether this is just a natural pause and consolidation or if the dollar has truly peaked. Bids ahead of the key 200-DMA at 91.95 coincide with offers ahead of the 200-DMA in EUR/USD at 1.2021, so it’s a reasonable range for near-term consolidation. This set-up favours long EUR/USD DNT, which still has potential for some big returns if the 1.17-1.2050 range holds.

EUR/USD may be laying foundations for new 2018 high

Should EUR/USD end the current downside correction near the recent low at 1.1717, the pair will have fulfilled the requirements of a minimum technical correction of the long-term uptrend from 1.0340 and subsequent gains could be sustained well above this year’s 1.2556 peak. EUR/USD traders are focused on the risk of a deeper flush out of long positions but most of those betting on a rise have not budged. That suggests longs are averaged at very good levels possibly below, but certainly closer to the start point of the rise since November 2017 at 1.1553. Unlike those long, many euro bears have got short recently with EUR 2.5 billion added in May to a net short position of EUR 13 billion, similar in size to the long bets currently deemed vulnerable. EUR/USD has been largely below 1.20 since the fresh shorts were added so the more vulnerable positions may be bets on a EUR/USD drop, which is probably reflected in today’s bounce after a swift surprise fall in Italian bond yields.


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