FX Market Update 30-5

Market Briefs
• EUR/USD 0.68%, USD/JPY 0.11%, GBP/USD 0.12%, EUR/GBP 0.61%
• DXY -0.45%, DAX 0.49%, FTSE 0.26%, Brent 0.34%, Gold -0.07%
• Italy renews attempt to form coalition and end turmoil
• Trade war risk stalks global economic upturn – OECD
• Italy’s crisis could become a disaster, warns Germany’s DIHK
• OECD says Japan should keep monetary easing but remain open to tweaks
• IMF maintains China’s 2018 GDP growth forecast at 6.6 pct
• EU Business Climate, 1.45, 1.30 f’cast, 1.35 prev
• EU Economic Sentiment, 112.5, 112.1 f’cast, 112.7 prev
• EU Industrial Sentiment, 6.8, 6.7 f’cast, 7.1 prev
• EU Services Sentiment, 14.3, 14.5 f’cast, 14.9 prev
• EU Consumer Confid. Final, 0.2, 0.2 f’cast, 0.3 prev
• EU Cons Infl Expec, 17.5, 16.1 prev
• DE Import Prices YY, 0.6%, 0.7% f’cast, -0.1% prev
• DE Retail Sales YY Real, 1.2%, 1.3% f’cast, 1.3% prev
• DE Unemployment Chg SA, -11k, -10k prev, -7k prev
• DE Unemployment Rate SA, 5.2%, 5.3% f’cast, 5.3% prev
• FR GDP Detailed QQ, 0.20%, 0.30% f’cast, 0.30% prev
• FR Consumer Spending MM, -1.5%, -0.2% f’cast, 0.1% prev
• China vows to protect its interests from “reckless” U.S. trade threats
• US, EU can still talk trade after tariffs, US envoy says

Looking Ahead – Economic Data (GMT) 
• 11:00 US MBA Mortgage Applications, -2.6% prev
• 11:00 US Mortgage Market Index, 366.7 prev
• 11:00 US MBA 30-Yr Mortgage Rate, 4.86% prev
• 12:00 DE CPI Prelim MM, 0.3% f’cast, 0%prev
• 12:00 DE CPI Prelim YY, 2% f’cast, 1.6% prev
• 12:00 DE HICP Prelim MM, 0.3% f’cast, -0.1% prev
• 12:00 DE HICP Prelim YY, 1.8% f’cast, 1.4% prev
• 12:15 US ADP National Employment, 190k f’cast, 204k prev
• 12:30 US GDP 2nd Estimate, 2.3% f’cast, 2.3% prev
• 12:30 US GDP Sales Prelim, 2.0% f’cast, 1.9% prev
• 12:30 US GDP Cons Spending Prelim, 1.1% prev
• 12:30 US Core PCE Prices Prelim, 2.5% f’cast, 2.5% prev
• 12:30 US PCE Prices Prelim, 2.7% f’cast, 2.7% prev
• 12:30 US Wholesale Inventories, 0.3% prev
• 12:30 US Redbook YY, 3.2% prev
• 12:30 CA Current Account C$, -18 bln f’cast, -146.35 bln prev
• 12:30 CA Producer Prices YY, 2.3% prev
• 14:00 CA BoC Rate Decision, 1.25% f’cast, 1.25% prev

Looking Ahead – Events, Other Releases (GMT)
• 18:00 US Federal Reserve issues its Beige Book on economic condition

Currency Summaries

EUR/USD
• EUR up early on rumours of no snap elections, later confirmed
• Salvini (lega) then calls for new election asap, but EUR setback limited
• 1.15 barrier certainly safer. EUR supply low 1.16’s, Tues 1.1640 high res
• German state inflation beats aiding EUR/USD support, awaits DE CPI 12GMT .
• Hedging costs ramped of late, some short term relief though
• BTP auction well received, albeit higher yields. DE/IT spreads off wides
• US yields recovering, DE too, US/DE 10yr off Tues new wide – 262 to 252

USD/JPY
• USD/JPY recovered from 108.36 to hit 108.88 today, but has stalled for now
• Net selling on EBS in Ldn and Tokyo, so spot vulnerable to a short squeeze
• USD/JPY’s bounce likely to be capped by the 30-DMA
• Should encounter solid supply as month-end approaches, talk of 109.25 offers
• Decent sized stops clustered below 108.00, a big option barrier level
• USD/JPY traders should keep watching 10-year UST-JGB spread

GBP/USD
• Offers pre-1.33 capped cable after it followed EUR/USD north early Europe
• 1.3293 was the European am high, 1.3257 = subsequent pullback low
• Offers near 1.33 also capped Tuesday’s climb from 1.3205 (6mth low)
• 1.3300 was Dec high (1.3293 was pre-weekend low)
• EUR/GBP rose half-a-penny to 0.8759 during the European am
• 0.8698 was Tuesday’s one-month low on Italian political turmoil

USD/CHF
• EUR buy-backs helped inflate EUR/CHF to 1.1508 during the European am
• 1.1508 = high water-mark for cross since Tuesday’s 8mth low of 1.1370

USD/CAD
• USD/CAD has fallen from 1.3040 to 1.2987 on a rise in risk appetite
• 1.3040 = seven pips shy of Tuesday’s two-month high
• BoC is expected to keep interest rates unchanged at 10am ET
• Huge 1.2900 option expiry for Thursday’s month-end NY cut, $2.48bln strike

AUD/USD
• AUD/USD rose to an intra-day high of 0.7539 during the European am
• Ascent influenced by rise in risk appetite: S&P e-mini +0.45% at 6.10am ET
• 0.7477 was Asia low on the back of AUD/JPY selling

NZD/USD
• NZD/USD has risen from 0.6883 to 0.6952 courtesy of a rise in risk appetite
• 0.6883 was 12-day low in Asia on the back of NZD/JPY selling

FX Options
• Implied vols and options to hedge EUR declines ramped higher this week
• Mild easing of short dated implied vols today as euro declines stall for now
• Downside risk keeps EUR put options in demand however
• EUR/USD risk reversals show their highest EUR put bias in a year
• Cross/JPY options being bought on dips after huge spikes already this week

COMMENT

Euro may cut to the chase if Italians vote in July
The euro remains at the mercy of Italian political events, so holding the next Italian election before August might be the least worst option for the single currency–unless an M5S/Lega coalition government is resuscitated without the eurosceptic Savona as its economy minister. September 9 had previously been mooted as the earliest likely date for the next Italian election, so holding it as early as July 29 would shorten the pre-vote period of uncertainty. Expectations of a strong showing for the eurosceptic Lega at the next election is the big fear for the euro: an IPSOS poll published on Wednesday showed support for Lega at 25.4%, eight percentage points above the share of the vote it received in the March 4 election. Lega leader Salvini on Wednesday said “the earlier we vote the better”. Lega also says it would not block rapid political solutions that would allow the country to handle possible emergencies.

CHART OF THE DAY

Short term gain but long term euro pain
The options market is selling shorter dated expiry EUR/USD implied vols to suggest they see 1.1500 barriers holding for now. The bench-mark 1-month implied vol contract saw mega gains this week from 7.6 to 9.2, but has been hit hard to 8.4 in early London Thursday as spot moves away from the 1.1500 danger zone. One-year vol up 1.0 to 8.35, one of its biggest spikes in years, but slower to ease as the longer term risk is yet to recede. However, implied vol premiums for EUR put versus EUR call options on risk reversals continues to gain, highlighting a market still fearful of the downside with plenty of risk that still needs to be hedged. The benchmark 1-month 25 delta risk reversals have been paid to 1.0 EUR puts in early London, 3-month to 1.2 and 6-month to 1.25 EUR puts – ever new long term highs. Hedging flows have been targeting levels around 1.10 since early last week. EUR put digital options may still offer some value to downside hedgers

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