FX Market Update 31-5

Market Briefs
• EUR/USD 0.21%, USD/JPY -0.03%, GBP/USD 0.27%, EUR/GBP -0.13%
• DXY -0.24%, DAX -0.4%, FTSE 0.12%, Brent -0.53%, Gold 0.3%
• EU HICP Flash YY, 1.9%, 1.6% f’cast, 1.2% prev
• EU Unemployment Rate, 8.5%, 8.4% f’cast, 8.6% prev
• FR CPI(EU Norm) Prelim YY, 2.3%, 2.0% f’cast, 1.8% prev
• FR Producers Prices MM, -0.6%, -0.4% prev
• IT Unemployment Rate, 11.2%, 10.9% f’cast, 11% prev
• IT Consumer Price Prelim MM, 0.4%, 0.2% f’cast, 0.1% prev
• IT Consumer Price Prelim YY, 1.1%, 0.8% f’cast, 0.5% prev
• IT CPI (EU Norm) Prelim MM, 0.4%, 0.3% f’cast, 0.5% prev
• IT CPI (EU Norm) Prelim YY, 1.1%, 1% f’cast, 0.6% prev
• GB Gfk Consumer Confidence, -7, -8 f’cast, -9 prev
• GB Nationwide house price YY, 2.4%, 3% f’cast, 2.6% prev
• GB BOE Consumer Credit, 1.832 bln, 1.3 bln f’cast, 0.254 bln prev
• GB Mortgage Lending, 3.894 bln, 3.8 bln f’cast, 3.9 bln prev
• GB Mortgage Approvals, 62.455k, 63k f’cast, 62.914k prev
• U.S. to slap tariffs on steel, aluminum from EU on Thursday -sources
• Polls show most Italians want to stay in euro
• Italy awaits decision on last-ditch deal to avoid snap elections
• Spanish PM’s future in balance as no-confidence debate hots up
• No signs of de-escalation in trade dispute with U.S. – Germany’s Scholz
• German carmakers hit by report Trump threatens to drive them off U.S. streets

Looking Ahead – Economic Data (GMT) 
• 11:30 US Challenger Layoffs, 36.081k prev
• 12:30 US Core PCE Price Index MM, 0.1% f’cast, 0.2% prev
• 12:30 US Core PCE Price Index YY, 1.8% f’cast, 1.9% prev
• 12:30 US PCE Price Index YY, 2% prev
• 12:30 US Initial Jobless Claims, 228k f’cast, 234k prev
• 12:30 US Jobless Claims 4-Wk Avg, 219.75k prev
• 12:30 US Continued Jobless Claims, 1.749 mln f’cast, 1.741 mln prev
• 12:30 US Personal Consump Real MM, 0.400%
• 12:30 US Personal Income MM, 0.3% f’cast, 0.3% prev
• 12:30 US Consumption, Adjusted MM, 0.400% f’cast, 0.400% prev
• 12:30 CA GDP QQ, 0.4% prev
• 12:30 CA GDP Implicit QQ Annualized, 1.8% f’cast, 1.7% prev
• 12:30 CA GDP Implicit Price QQ, 1.2% prev
• 12:30 CA GDP MM, 0.2% f’cast, 0.4% prev
• 14:00 US Pending Homes Index, 107.6 prev
• 14:00 US Pending Sales Change MM, 0.4% f’cast, 0.4% prev

Looking Ahead – Events, Other Releases (GMT) 
• N/A Bank of England and CEPR are holding a conference in London
• 16:50 Sylvain Leduc, Bank of Canada Deputy Governor speaks in Quebec
• 17:00 Fed’s Brainard speaks at New York

Currency Summaries

EUR/USD 
• 5S/Lega try to form new government, talks ongoing, relief rally for now
• IT/DE yield spreads off highs, EU bank stocks recover, EUR to 1.1725
• Hedging of 10bln 1.1700-50 options Thurs/Fri caps, bulk are at 1.1700
• Even EZ inflation data beats failed to give EUR more legs
• 10dma 1.1693 n/t support, before Thurs 1.1648 low, 1.8bln 1.1650 expiry
• Resistance 1.1756 – 23.6% of 1.2556-1.1510 drop, falling 21-dma 1.1997
• Options still hedging for new Italy election risk

USD/JPY
• Wednesday saw the 2nd largest 10-yr UST-JGB spread widening of 2018
• Thursday sees the spread widening persist, fuelling USD/JPY bulls
• Strong relationship between spot, 10-yr UST-JGB spread persists
• Tech bias, however, remains on the downside while 30-DMA caps
• USD/JPY bid in today’s 108.55-109.00 range, but talk decent offers on top
• Heavy above the 109.00 level now, Japan exporter sell-rally strategies

GBP/USD 
• Cable rose to threaten 1.3350 (approximate 10DMA) during the European am
• The rise was fuelled by EUR/USD ascent to threaten 1.1728 (Monday’s high)
• EUR/GBP also rose to eye 0.8794 (Monday’s high) during the European am
• Euro gains spurred by further decline in Italy bond yields on Italy govt hopes
• 1.3205 was six-month cable low Tuesday when EUR tanked on Italy turmoil
• 0.8698 was one-month low for EUR/GBP Tuesday (0.8696 = 1.15 GBP/EUR)

USD/CHF
• EUR/CHF extended north to 1.1571 (three-day high) during the European am
• Ascent fuelled by further decline in Italy bond yields on Italy govt hopes
• 1.1520 = low since 1.1571 (latter level is peak since Tuesday’s 1.1370 low)
• Decent size 1.1525 option expiry Friday, EUR 360mn strike

USD/CAD 
• USD/CAD dropped to test 1.2837 during the European am
• Drop accompanied talk of month-end USD selling
• 1.2837 was Wednesday’s low aftter CAD soared on hawkish BoC
• Offers ahead of 1.29 kept a lid on USD/CAD in Asia
• Huge 1.2900 option expiry for month-end NY cut, $2.8bln strike

AUD/USD 
• 0.7590 offers capped AUD/USD after it vaulted 0.7584 (Wednesday’s high)
• More offers are tipped at 0.7600-10 (0.7605 was last week’s high)
• Big 0.7600/05 option expiries for month-end NY cut, A$1.95bln strikes
• Stops mooted above 0.7613, 50% of 0.7813 (Apr high) to 0.7413 (May low)
• Wednesday rise to 0.7584 fuelled by risk appetite rise on calmer Italy
• 0.7553 was Asia low on weaker than expected Australian Capex data

NZD/USD
• NZD/USD rose to a three-week peak of 0.7005 during the European am
• Ascent accompanied talk of month-end USD selling
• 0.6970-0.6990 was Asia range. 0.6998 was Wednesday’s high
• Wednesday rise to 0.6998 fuelled by risk appetite rise on calmer Italy

FX Options
• Short term relief apparent with near dated G10 option vols hit from spike highs
• Longer term risk still very much in the spotlight however, hedging via EUR puts
• Risk reversals after 3-month expiry retain a strong EUR puts bias to highlight
• JPY call options also hold a firm bid on fears risk aversion could return
• Huge 10bln EUR/USD expiries 1.1700-50 Thurs/Fri limit euro recovery

COMMENT

EUR hedging flows suggest Italy threat far from over
Hopes that Italy can avoid another election have prompted a relief rally in the euro and some unwinding of near-dated downside protection, but options suggest the threat from Italian politics is far from over. Hedgers continue to buy downside protection via options with expiries falling after the speculative Italian election dates, on fears that Italy is still likely to head back to the polls if the latest efforts to form a government fail. The earliest possible election date has been touted as July 29, though after September looks more likely. Options with maturities falling in three months and later continue to be bought and dealers are charging high premiums for them. This is most apparent when looking at risk reversals – the implied vol premium for EUR put versus EUR call options, which spiked dramatically over the last couple of weeks and are yet to ease. Shorter-dated expiry options have been hit hard, however, as downside risk recedes for the near-term as markets await the outcome of the latest talks.

CHART OF THE DAY

EUR/USD rebound looks to have legs, just
EUR/USD bulls are regaining the initiative as the Italian political storm abates but the reprieve could prove short-lived if the situation worsens. EUR/USD posted its second biggest 2018 one-day rise of 2018 on Wednesday as Italy moved to ease the political turmoil. There’s growing scope for further gains through the 1.1757 Fibonacci level — 23.6% retrace of the 1.2556 to 1.1510 (2018 fall). While a large amount of political uncertainty persists in Italy, the EUR/USD recovery is likely to persist if Lega drops its insistence that eurosceptic Paolo Savona be the economy minister in an M5S/Lega coalition government. EUR/USD’s recovery on Tuesday from a new 2018 1.1510 low and subsequent sharp rebound on Wednesday was hard won. Tuesday and Wednesday saw the second and third largest trading volumes of 2018 respectively, which means the gains are built on solid foundations. A turn for the worse in Italian politics will dent the near-term recovery.

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