FX Market Update 1-6

Market Briefs
• EUR/USD 0.14%, USD/JPY 0.43%, GBP/USD 0.11%, EUR/GBP -0.02%
• DXY -0.04%, DAX 0.94%, FTSE 0.77%, Brent 0.03%, Gold 0.13%
• U.S. allies hit back at Washington’s steel, aluminium tariffs
• U.S. job growth seen picking up, wage growth likely moderate
• Markets breathe easier as Italy government sworn in
• Spanish Socialist Sanchez succeeds Rajoy as prime minister
• EU Markit Mfg Final PMI, 55.5, 55.5 f’cast, 55.5 prev
• DE Markit/BME Mfg PMI, 56.9, 56.8 f’cat, 56.8 prev
• FR Markit Mfg PMI, 54.4, 55.1 f’cast, 55.1 prev
• IT Markit/ADACI Mfg PMI, 52.7, 52.9 f’cast, 53.5 prev
• IT GDP Final YY, 1.4%, 1.4% f’cast, 1.4% prev
• GB Markit/CIPS Mfg PMI, 54.4, 53.5 f’cast, 53.9 prev
• China defends free trade ahead of Ross visit
• UK considering giving Northern Ireland joint UK, EU status – UK source
• Gold steadies below $1,300/oz ahead of U.S. payrolls data
• Oil prices steady amid U.S. supply growth, OPEC uncertainty

Looking Ahead – Economic Data (GMT) 
• 12:30 US Non-Farm Payrolls, 188k f’cast, 164k prev
• 12:30 US Private Payrolls, 183k f’cast, 168k prev
• 12:30 US Unemployment Rate, 3.9% f’cast, 3.9% prev
• 12:30 US Average Earnings YY, 2.7% f’cast, 2.6% prev
• 13:30 CA Markit Mfg PMI SA, 55.5 prev
• 13:45 US Markit Mfg PMI Final, 56.6 prev
• 14:00 US Construction Spending MM, 0.8% f’cast, -1.7% prev
• 14:00 US ISM Manufacturing PMI, 58.1 f’cast, 57.3 prev
• 14:00 US ISM Manuf Employment Idx, 54.5 f’cast, 54.2 prev
• 14:00 US ISM Manuf New Orders Idx, 61.2 prev

Looking Ahead – Events, Other Releases (GMT) 
• 12:55 Minneapolis Fed President Neel Kashkari speaks in Minnesota
• 13:10 Bank of England chief economist Andy Haldane speaks in Glasgow
• 00:30 Dallas Fed President Rob Kaplan speaks at Dallas

Currency Summaries

• EUR/USD failing to garner much strength despite Italy resolution
• 1.1665/1.01717 range Fri, within Thurs 1.1641-1.1725
• Close above 10DMA 1.1685 opens 38.2% of 1.2556-1.1510 at 1.1756
• Italian fiscal policy headwinds, less so Spain
• Another Huge 1.1700 expiry NY cut, awaits NFP, but risk tame
• O/n Option break-even 60 pips. Hedgers pair downside risk

• BOJ cut size of 5-10 year JGBs purchases by 20B to 430B yen
• This saw USD/JPY trade a 108.74-109.21 (biggest one-hour range since May 24)
• Those who sold post-BoJ QQE/YCC tweak covered, other weak shorts too
• Stop fest saw spot eventually rise to 109.25 in Asia, Ldn extend to 109.30
• Japanese exporters remain on top and are slowing the rise
• Bulls will likely run into supply at the 30-DMA. US NFPs loom

• Cable all-but revisited 1.3300 (Asia high) on the back of the UK mfg PMI beat
• 54.4 vs 53.5 f/c. Beat is boost for hawks advocating BoE rate hike in Aug
• 1.3254 was late Asia low (1.3254 = low since Thursday’s high of 1.3348)
• EUR/GBP down to 0.8788 intra-day low on UK PMI beat vs 0.8808 Asia high
• 0.8808 = 17-day high (100 pips above Tuesday’s 1mth low on Italy turmoil)
• UK construction and service sector PMIs due Monday and Tuesday

• EUR/CHF retreated to 1.1520 from an early Europe intra-day high of 1.1564
• Decent size 1.1520 option expiry for 10am ET NY cut, EUR 370mn strike
• 1.1564 = high water-mark since Thursday’s low of 1.1465

• USD/CAD is trading close to 1.2950 ahead of US jobs data at 12:30GMT
• Large 1.2950 option expiry for 10am ET NY cut, USD 745mn strike
• 1.2931-1.2966 is Friday range-to-date after Thursday surge to 1.2990
• Thursday’s surge was fuelled by disappointing Canada GDP data

• AUD/USD extended south to threaten 0.7535 in early European trade
• 0.7535 is 50% of 0.7477 (Wednesday’s low) to 0.7593 (Thursday’s high)
• Global trade concerns are helping weigh on the AUD
• U.S. steel and aluminum tariffs kicked in at 0400GMT
• RBA is expected to keep its cash rate at 1.5% next week (Tuesday)

• NZD/USD respected its 0.6984 late Asia low through the European am
• 0.7020 was Asia high (before drop to 0.6984). 0.7024 = 23-day high Thursday
• NZ terms of trade fell in Q1 as softer dairy prices pulled down export values

FX Options
• Risk improving since Italian resolution and implied vols give back more gains
• Recent bets to cover deeper euro slide are being pared en mass
• EUR/USD vols and risk reversals see a big retracement from spike highs
• USD/JPY downside risk abating also – Vols and JPY calls lower amid firmer spot
• NFP risk premiums around 60 pips for o/n EUR/USD and USD/JPY


Spain is low risk event for euro compared to Italy 
Spain’s PM Rajoy is set to be voted out of office in a no-confidence motion today but the effect on the euro is expected to be negligible. Socialist leader Pedro Sanchez on Thursday secured the backing of six smaller parties for the motion, giving him the absolute majority he needs to take over from Rajoy. With most Spanish parties and Sanchez himself being pro-European, there is less risk to the euro from Spanish political developments than was the recent case in Italy. Political turmoil in Italy depressed EUR/USD to a 10-month low of 1.1510 on Tuesday and spurred buying of options to hedge against deeper EUR declines, but those trades are being unwound en masse. Italy’s borrowing costs fell sharply on Friday, with the 2-year government bond yield back at levels prior to Tuesday’s rout.


EUR/USD hedgers call time on the downside
The EUR/USD downside hedging via options that dominated flows this week has now abated quite significantly, suggesting that dealers see any deeper declines in the euro as limited, certainly in the near term. Italy appears to have resolved it’s government crisis, reducing headline volatility and removing the need for near-term protection as the market is now looking for a period of relative calm. Implied vols have seen a sharp retracement over recent sessions, with the benchmark 1-month ATM contract back at 7.35 after the spike from 7.1 to 9.2 earlier this week. Risk reversals (the implied vol premium for EUR puts over EUR calls), have also seen a sharp retracement – the 1-month 25-delta contract peaked at 1.0 mid-week but is now back to 0.55. Biggest gains had been in 3-month and 1-year risk reversals, spiking to 1.25 and 1.0 respectively, their highest in a year, but also now under pressure. 1mth EURUSD implied vol


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