FX Market Update 23-5

Market Briefs 
EU Markit Mfg Flash PMI, 55.5, 56 f’cast, 56.2 prev
EU Markit Serv Flash PMI, 53.9, 54.6 f’cast, 54.7 prev
EU Markit Comp Flash PMI, 54.1, 55 f’cast, 55.1 prev
DE Markit Mfg Flash PMI, 56.8, 57.8 f’cast, 58.1 prev
DE Markit Service Flash PMI, 52.1, 53 f’cast, 58.1 prev
DE Markit Comp Flash PMI, 53.1, 54.7 f’cast, 54.6 prev
FR Markit Mfg Flash PMI, 55.1, 53.7 f’cast, 53.8 prev
FR Markit Serv Flash PMI, 54.3, 57.2 f’cast, 57.4 prev
FR Markit Comp Flash PMI, 54.5, 56.6 f’cast, 56.9 prev
FR ILO Unemployment Rate, 9.20%, 8.80% f’cast, 8.90% prev
GB Core CPI YY, 2.1%, 2.2% f’cast, 2.3% prev
GB CPI YY, 2.4%, 2.5% f’cast, 2.5% prev
GB RPI YY, 3.4%, 3.4% f’cast, 3.3% prev
GB RPIX YY, 3.4%, 3.4% prev
GB RPI Index, 279.7, 278.3 prev
Trump factor leaves Macron scrambling ahead of Russia trip
Italy’s Conte remains League, 5-Star candidate for prime minister-Di Maio
Black candidate makes history as women advance in U.S. midterms
Gold prices slip ahead of Fed minutes
Oil prices slip on potential easing of OPEC supply curbs

Looking Ahead – Economic Data (GMT)
11:00 US MBA Mortgage Apprications, -2.7% prev
11:00 US Mortgage Market Index, 376.5 prev
11:00 US MBA Purchase Index, 252.4 prev
11:00 US Mortgage Refinance Index, 1,057.1 prev
11:00 US MBA 30-Yr Mortgage Rate, 4.77% prev

Looking Ahead – Events, Other Releases (GMT) 
18:00 FOMC will release its minutes in Washington, D.C.
18:15 Fed’s Neel Kashkari speaks in North Dakota

Currency Summaries

EUR/USD

EUR/USD trades 1.1698 as risk-off conditions fuel long liquidation
If risk aversion builds euro will eventually garner support as it’s a safer asset
Support likely @ weekly cloud top @ 1.1682, 30-day daily Bollinger 1.1614
Softer than expected German and EZ PMIs add to the risk-off feel
German May composite PMI 53.1 vs 54.7 f/c, EZ 54.1 vs 55.0 f/c

USD/JPY

Risk aversion nL2N1ST0WQ, TRY/JPY drop, narrower 10-yr UST-JGB yields hurt
Asia saw the then biggest one-hour fall of May
London subsequently sees a bigger one-day fall as USD/JPY bears tighten grip
London one-hour 35 pip drop (open 110.33, close 109.98) the most seen in May
Market below the 200-DMA at 110.20 and the 109.78 Fibo. Range 109.56-110.92
109.78 Fibo — 23.6% retrace of the 104.56 to 111.39 (March-May) rise

GBP/USD

Cable fell to fresh 2018 low of 1.3347 on softer than expected UK CPI
2.4% vs 2.5% f/c, low since Mar 2017. Blow for hawks advocating Aug BoE hike
1.3372 was low before 0830GMT data as GBP/JPY slid on risk aversion
EUR/GBP rose to threaten 0.8788 from 0.8740 low on German/EZ PMI misses
0.8788 was Tuesday’s one-week high before EUR fell on Italy concerns
UK ONS Apr retail sales data due Thursday, +0.7% MM and +0.1% YY f/c

USD/CHF

A run of eight bear days out of nine takes EUR/CHF below 200DMA
EM carry unwinds being blamed for latest flow into the CHF
TRY melt down a standout Wed factor, USD/TRY up over 4.0% to 4.9290
EUR/CHF has now lost 3.2% since May 14 to reach 1.1600
Former 1.20 SNB floor out of the picture as 1.1448 Feb 8 low attracts
USD/CHF breaking lower from early may consolidation around parity
Spots plays 0.9894-0.9935 and cross 1.1600-1.1695

USD/CAD

USD/CAD extended north to test 1.2890 during the European am
Ascent fuelled by CAD/JPY losses on risk aversion
1.2890 was Monday’s high (1.2742 was Tuesday’s 11-day low)
Offers expected ahead of 1.2925 (option barrier level)
1.2924 was last week’s high (May 15). 1.30 key resistance beyond
Oil prices ease on potential easing of OPEC supply curbs

AUD/USD

AUD/USD extended south to test 0.7525 (21DMA) during the European am
Losses fuelled by steep decline in AUD/JPY on risk aversion
AUD/USD scaled 4wk peak of 0.7605 Tuesday before risk sentiment shift
0.7500 is another support level. Large 0.7500 expiry Friday, AUD 1.3bln strike
RBA Governor Lowe says China among biggest economic risks for Australia

NZD/USD

NZD/USD extended south to threaten 0.6885 in early European trade
Losses fuelled by NZD/JPY weakness on risk aversion
0.6885 was Monday’s low. 0.6945 was Asia high, pre-RBNZ research paper
RBNZ prepared for “unconventional policy” in case of crisis

FX OPTIONS 
Implied vols up across the board, risk is off and CHF and JPY havens gain
USD/JPY falls sharply sub 110.00, implied vols and JPY calls spike higher
Cross/JPY vols and JPY calls up hard too as JPY gains
EUR/USD took out 1.17 barrier after DE and EZ pmi’s missed

COMMENT

USD/JPY retreat prompts panic options buying

The USD/JPY options market seems to be in panic buying mode, with relentless demand for implied vols and JPY call options in early London Wednesday. The speed of the USD/JPY setback seems to have caught many in the market off guard, even though options were already signalling a USD/JPY top late yesterday  The market is short gamma and downside options, and clearly fearful about increased spot volatility and deeper potential declines. One-week vol was as low as 5.7 or 70 pips break-even for the ATM straddles Tuesday, but now over 2.5 higher at 8.0 or 98 pips. One-month vol has been lingering in the upper 6s for the last few weeks but has traded multiple times en-route to 7.65 so far today. There’s been decent demand for a range of JPY call options around the 2-month date with strikes ranging from 108 to 104. One-month 25 delta risk reversals (JPY call implied vol premium over JPY puts) are now 1.0 from 0.45 Tuesday, its biggest 1-day gain since the early Febuary stock rout and 1-year risk reversals now 1.55 from 1.35. USD/JPY 1mth risk reversals:

Risk-off impact on euro may be short lived

The risk aversion that’s stemming from big drops in many emerging markets may weigh on EUR/USD in the short-term but could also lay the foundations for future strong support. Afforded deep liquidity and backed by a big current account surplus, the euro is seen as a relatively safe asset but when speculators are as long as they currently are IMM/FX, the initial reaction is to pare back existing risk which will weigh on EUR/USD. When speculative risk becomes more balanced, the pendulum may quickly swing back in the euro’s favour as the same risk aversion is spurring a move to buy U.S. Treasuries, pushing down yields and cutting off the fuel behind the USD’s rally. That will take the heat out of USD/EM rallies, leading to a reduction in c.bank rebalancing interventions recently weighing on EUR/USD. EUR/CHF has likely fallen too fast for the SNB, so coupled with possible EUR/CHF intervention, which has already proved to be a strong prop for EUR/USD, risk averse markets will eventually underpin the single currency. EUR/CHF and spec positions.

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