FX Market Update 25-5

Market Briefs
• EUR/USD -0.06%, USD/JPY 0.19%, GBP/USD -0.18%, EUR/GBP 0.16%
• DXY 0.11%, DAX 1.07%, FTSE 0.23%, Brent -1.91%, Gold 0.03%
• DE Ifo Business Climate New, 102.2, 102.0 f’cast, 102.1 prev
• DE Ifo Curr Conditions New, 106.0, 105.5 f’cast, 105.7 prev
• GB GDP 2nd Release YY, 1.2%, 1.2% f’cast, 1.2% prev
• GB Business Invest YY Prelim, 2%, 2.6% prev
• IT Flash Trd Bal Non-EU, 1.86 bln
• UK Finance Mortgage Apps, 38.049k, 37.567k prev
• North Korea says it’s still open to talks after Trump cancels summit
• Early ECB bank loan repayments loom, threaten to raise borrowing costs
• U.S. Commerce’s Ross to visit China for trade talks in early June
• OPEC, Russia discuss raising oil output by about 1 mln bpd – sources
• China Inc tightens reins on debt, raises spectre of slowdown
• Turkish lira recovers on the day, central bank takes move on corporate forex
• Gold holds above $1,300 after Trump ditches North Korea summit
• Oil prices slump as Saudi Arabia and Russia consider output boost

Looking Ahead – Economic Data (GMT)
• 12:30 US Durable Goods, -1.4% f’cast, 2.6% prev
• 12:30 US Durables Ex-Transport
• 14:00 US U Mich Sentiment Final, 98.8 f’cast, 98.8 prev
• 14:00 US U Mich 1 Yr inf Final, 2.8% prev
• 15:00 CA Budget Balance, C$, 2.83 bln prev
• 15:00 Budget, Year-To-Date, C$, -5.56 bln

Looking Ahead – Events, Other Releases (GMT) 
• 12:15 BoE’s Mark Carney speaks at Stockholm, Sweden
• 13:20 Fed Chairman Jerome Powell speaks at Stockholm, Sweden
• 13:40 ECB’s Coeure speaks at Stockholm, Sweden
• 15:45 Fed’s Presidents Bostic, Evans, Harper, Kaplan participate in an event in Dallas
• 19:20 Bundesbank president Jens Weidmann speaks in Stockholm, Sweden

Currency Summaries

EUR/USD
• EUR/USD 1.1685 low in early Europe trades 1.1729 after IFO and OPEC news
• Germany’s IFO 102.2 in May beats 102.0 f/c and prior 102.1
• OPEC are mulling a rise in production of a million BPD
• ECB’s Likanen says may need to tolerate inflation above 2%
• EUR/USD drops back towards 1.1700 ahead NA open and EUR 1.3bln exp 1.1700-25

USD/JPY
• 109.13-74 in Asia, gotobi and short cover, NoKo news too
• Resistance/sellers Thurs London high and 21DMA 109.76/79, 200dma 110.19
• Fall to 109.35 since, pair still vulnerable to headlines, risk aversion
• Stocks looking toppy. Options charging high premium for downside protection
• Support Thurs 108.96 low, 108.78 key – 38.2% of 104.56-111.39 Mar-May rally
• 108.78 break targets 100dma 108.28, 55dma 107.97

GBP/USD
• Cable extended south to 1.3331 on negative UK Q1 business investment
• Down 0.2% after 0.3% rise in Q4. 2nd estimate of UK Q1 GDP as per 1st
• 1.3331 = lowest level since Thursday’s 1.3422 high on UK retail sales beat
• Profit-taking on GBP shorts/USD longs aided rise from 1.3331 to 1.3377
• 1.3400 is a resistance level pre-1.3422. Bids tipped pre-1.3300 (Dec low)
• 1.3305 was 2018 low Wednesday. Stops tipped below 1.3300

USD/CHF
• EUR/CHF loss consolidation just below 200DMA, 1.1651
• Makings of a bearish continuation pattern on daily chart
• Daily lows from Feb to early Mar next target, 1.1448-1.1485
• Watching the risk markets and Italian political risk
• Cross plays 1.1595-1.1642 and spot 0.9905-0.9931
• Dollar gain consolidation close to its DXY high

USD/CAD
• Offers ahead of 1.2925 are keeping a lid on USD/CAD
• 1.2923 = European am high. 1.2921 was Wednesday’s high
• 1.2924 was last week’s high (May 15). Lower oil prices weighing on CAD
• WTI $69.35/barrel at 6am ET vs recent 3yr+ high near $73/barrel
• Huge 1.2900 option expiry for month-end NY cut next week, $2.4bln strike

AUD/USD
• AUD/USD rallied from 0.7553 to a high of 0.7590 during the European am
• Fresh offers expected around 0.7600: large 0.7600 option expiry for NY cut
• AUD 540mn strike. Another 0.7600 expiry Monday, AUD 459mn strike
• Prior offers around 0.7600 capped AUD/USD at four-week high Tuesday

NZD/USD
• NZD/USD rose from 0.6913 to threaten 0.6938 during the European am
• 0.6938 was Asia high. 0.6937 = Thursday high. 0.6945 = Wednesday high
• Big 0.6900 option expiry for month-end NY cut next week, NZD 1.85bln strike

FX Options
• Implied vols sold from mid-week highs as markets calm in to long UK/US weekend
• Downside risks still apparent however in several of the G10 majors
• GBP puts, EUR puts and JPY calls all bid on related risk reversals
• Downside hedging in EUR/USD continues as dealers fear potential to 1.10 m-term
• GBP barriers at 1.3300 prop for now, but remain vulnerable to any new Brexit woes

COMMENTS

Flagging UST yields, oil may see steep USD drop

U.S. bond yields may have seen their most significant highs for now which could see the tide turning against the dollar and with OPEC discussing raising oil output, the greenback may be more vulnerable versus currencies whose nations rely on energy imports. Most Fed rate watchers look to benchmark UST 10-year yields for inspiration, but as a lot of the dollars sold to fund carry trades last year and bought back this year were influenced by thinking about where bond yields will go over the long term, the long bond should matter more. So the failure of the 30-year to break the key 3.25% mark which has held since 2014 looks significant and has likely influenced the concurrent retreat in the 10-year yield below 3%. The USD’s rise on higher yields has been intense, acutely so versus energy-dependent nations with USD/INR up over 5%, USD/JPY 4.4% and USD/TRY 24% (though in the latter Turkish policies stoked the rise) in the last two months alone. Global stocks have remained buoyant with rising U.S. yields so are likely to remain firm or rally with them off the boil, which would boost higher risk FX. USD vs oil importers.

Pound could get tangled up in Scottish spider web

Sterling could suffer if momentum for a second referendum on independence for Scotland starts to build through Britain’s scheduled EU exit in March 2019. The ‘indyref2’ issue has been in hibernation since the SNP’s worse than expected performance in the June 2017 UK general election, but SNP leader Sturgeon recently said she would consider again the timing of another independence referendum “once we get some clarity, which hopefully we will in autumn of this year, about the Brexit outcome”. A majority of citizens in Scotland voted to remain in the EU in the Brexit referendum–when a majority of citizens in Britain voted to leave. If and when ‘indyref2’ is held, currency will be a big issue–as it was during the first Scottish independence referendum in September 2014. The BBC reports that an independent Scotland would keep the pound for at least 10 years under plans to be set out by the SNP’s Growth Commission Friday

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