FX Market Update 29-5

Market Briefs
• EUR/USD -0.65%, USD/JPY -0.52%, GBP/USD -0.39%, EUR/GBP -0.26%
• DXY 0.68%, DAX -1.41%, FTSE -1.32%, Brent 0.65%, Gold 0.4%
• Italy central bank says confidence at risk if debt not reined in
• Fed’s Bullard: difficult for U.S. to raise rates far beyond other cenbanks
• EU Money-M3 Annual Grwth, 3.9%, 3.9% f’cast, 3.7% prev
• EU Loans to Households, 2.95, 3% prev
• FR Consumer Confidence, 100, 101 f’cast, 101 prev
• IT MFG Business Confidence, 107.7, 107.2 f’cast, 107.7 prev
• IT Consumer Confidence, 113.7, 116.5 f’cast, 117.1 prev
• Top N.Korean officials travel to U.S., Singapore in summit preparations: media
• German wages rise by 2.5 percent in first quarter
• Trump giving Japan’s Abe a hard time on trade despite close ties
• Euro zone money markets slash 2019 ECB rate-hike bets
• Gold prices ease as strong dollar weighs on market

Looking Ahead – Economic Data (GMT) 
• 13:00 US CaseShiller 20 MM SA, 0.7% f’cast, 0.8% prev
• 13:00 US CaseShiller 20 MM NSA, 0.7% prev
• 13:00 US CaseShiller 20 YY, 6.5% f’cast, 6.8% prev
• 14:00 US Consumer Confidence, 128 f’cast, 128.7 prev
• 14:30 US Dallas Fed Mfg Bus Idx, 21.80 prev

Looking Ahead – Events, Other Releases (GMT) 
• N/A Frankfurt Finance Summit
• 15:30 ECB board member Sabine Lautenschlager speaks about monetary policy in Frankfurt
• 21:00 Reserve Bank of New Zealand publishes Financial Stability Report

Currency Summaries

EUR/USD

• DE/IT 10yr spreads broke above 300 as Italy political woes hit hard
• Fears of another EU banking crisis, even EU break-up fuelling EUR bears
• DE/US 10yr spreads exacerbated EUR/USD decline as they widened above 260
• EUR/USD broke Nov range low/barriers 1.1553/50 for 1.1515, recoveries tame
• Some profit taking slows decline, bond spreads off worst too
• 1.1500 barriers large, break opens 50% fib of 103.40-1.2556 at 1.1448

USD/JPY 
• USD/JPY tripped 108.50 stops, hit 108.43, 108.85 since, dly Tenkan 108.84
• Risk averse flows from Italy/EU maintain pressure, especially EUR/JPY
• EUR/JPY decline held by profit takes ahead of large 125.00 barriers
• Next USD/JPY support 100/55 DMA 108.20/06 and 50% of 104.56-111.39 at 107.98
• Break opens daily cloud 107.42-106.68, mid-May multi day lows 106.62
• JPY related hedging costs ramped on fears of more JPY gains

GBP/USD
• Cable slid to a fresh six-month low of 1.3205 during the European am
• More stale GBP longs jettisoned during the slide
• EUR/USD losses on Italy political turmoil catalyst for drop to eye 1.3200
• 1.3200 is an option barrier level. 1.3298-1.3323 was Asia range
• 1.3293 was pre-weekend low and Monday’s low (1.3300 = Dec low)
• EUR/GBP fell to one-month low of 0.8706 during the European am

USD/CHF
• Italy uncertainty leaning on EUR again and CHF attracting safety flow
• EUR/CHF drops to 1.1449, last at this level Feb: Closed Mon at 1.1552
• Price tracking lower below 30DMA lower Bolli line, 1.1561
• Close below 1.1530 to open up drop under 1.1448 early Feb low
• EUR/USD cracks 1.16, It/De spreads new wides-10yr 261.00, It 2yr yld +81bps
• Italian bond carnage shaping broader markets early Tuesday
• European stocks down after Asian indices fall

USD/CAD
• USD/CAD rose by nearly half-a-cent to 1.3025 during the European am
• 1.3025 = fractionally fresh two-month high. 1.3022 was Monday’s high
• CAD has been hurt by recent steep fall in oil prices
• Freeland in Washington Tuesday and Wednesday for NAFTA talks

AUD/USD
• AUD/USD fell from 0.7545 to threaten 0.7516 during the European am
• 0.7516 was eight-day low in Asia, courtesy of risk aversion
• Risk aversion fueled by Italian political turmoil

NZD/USD
• NZD/USD dropped to threaten 0.6906 during the European am
• 0.6906 was May 25 low. 0.6923-0.6949 was Asia range
• Huge 0.6900 option expiry for month-end NY cut (Thursday)

FX Options
• Vols higher across the board as Italian political woes boost hedging costs
• Entire EUR/USD curve above 8.0 vols, risk reversals long term highs for EUR puts
• Buyers of JPY call options lift USD/JPY risk reversals and implied vols there
• EUR/JPY options see biggest gains, large 125.00 barriers stem spot decline
• Cable hedgers cover for potential falls to 1.3000 within a 1-month horizon

COMMENT

Hedging demand signals more yen gains in store 
The yen looks poised for further gains with fX option flows showing increased demand for hedges to cover further JPY appreciation against other G10 currencies as Italy’s political travails and their impact on the wider euro zone add to risk aversion. Dealers started to buy these options early last week, in a clear signal to the market that the recent USD/JPY rally had peaked nL2N1ST0P9, but increased buying and price gains since show a market more concerned with continued JPY gains. The price of JPY call versus JPY put vol premiums when looking at risk reversals has doubled in the majority of JPY related pairings over the last week. The benchmark 1-month expiry USD/JPY risk reversal is trading new highs since March above 1.1 JPY calls and 1-month EUR/JPY risk reversals 1.7 JPY calls/EUR puts. There have been buyers of near-term expiry (sub 1-month) JPY call options outright too, with strikes around two big figures below current spot levels in GBP/JPY and AUD/JPY this week. Implied vols in all yen pairings have seen sharp gains, but EUR/JPY is clearly the front runner as EUR weakness fuels its decline. 1mth EURJPY vol:

CHART OF THE DAY

GBP/USD longer-term charts point to low 1.20s
There seems to be little respite in sight for bruised cable, with technicals pointing to further pain. The monthly chart is probably the most damning for cable with a convincing break in May below a bull channel, 1.3748, taken off the significant 1.1491 October 2016 low. The 30-MMA has also given way and bears are now sizing up a move below the monthly kijun line and 21-MMA, 1.3257 and 1.3110 respectively. Bear targets off a longer-term Fibonacci retrace, 1.1491-1.4377, present a possible drop to levels approaching 1.20–the 38.2% at 1.2278 and 50% at 1.2128. As charts show increasing deterioration, a sizeable move against sterling mid-to-longer term could be on the cards. Of significance is the narrowing of 30-DMA Bollinger lines. This can indicate a marked drop in volatility and a precursor to a period of sharp volatility and a price breakout or acceleration in a trend. Narrowing Bollingers also noted on weekly and monthly charts. Weekly price moves are approaching the top of the Ichimoku cloud, 1.3209, and a break would open the way to the converged 100-WMA and 30-WMA lower Bollinger, currently 1.3066

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