FX Market Update 4-6

Market Briefs
• EUR/USD 0.59%, USD/JPY 0.05%, GBP/USD 0.31%, EUR/GBP 0.25%
• DXY -0.45%, DAX 0.26%, FTSE 0.74%, Brent -1.05%, Gold 0.1%
• EU Sentix Index, 9.3, 18.4 f’cast, 19.2
• EU Producer Prices YY, 0%, 0.3% f’cast, 0.1% prev
• GB Markit/CIPS Cons PMI, 52.5, 52 f’cast, 52.5 prev
• China says in principle door is open to talks with U.S. on trade
• With Trump tensions high, Merkel reaches out to Macron on Europe
• Singapore designates special zone for Trump-Kim summit
• Turkish inflation climbs in May, fuels rate hike expectations
• Gold firms as dollar wilts, but U.S. rate hike view curbs gains
• U.S. crude eases for 3rd day on expectations of higher supplies

Looking Ahead – Economic Data (GMT) 
• 13:45 ISM-New York Index, 779.3 prev
• 13:45 ISM NY Biz Conditions, 64.3 prev
• 14:00 US Employment Trends, 108.1 prev
• 14:00 US Factory Orders MM, -0.5% f’cast, 1.6% prev

Looking Ahead – Events, Other Releases (GMT)
• 17:00 BoE’s MPC member Silvana Tenreyro speaks in Guildford, UK

Currency Summaries

EUR/USD
• EUR/USD extends the recovery made in wake of formation of Italian Govt
• Pair hits 1.1734, further above 23.6% retr drop made from 1.2414 on Apr 17
• Targets 38.2% retrace of the 1.2414-1.1510 drop at 1.1855
• Italy risks were a core driver for EUR 7.5bln of shorts added in May
• Large size bearish bets suggests euro to be well supported during correction
• Risks lie up with next pivot seen at 21-DMA @ 1.1770

USD/JPY
• Spot underpinned by UST-JGB 10-year spread widening. 109.45-77 range today
• BoJ QQE trim, U.S jobs fueled Friday’s 8th biggest one-day rise
• USD/JPY closed up 65 points on Friday, the largest one-day gain since May 15
• Bullish assault Friday was stymied by decent offers near kijun line
• Kijun line, which remains at 109.76, is widely watched in Tokyo
• Battle to persist around kijun, as huge 110 NY cut (1.7B) expiry may draw

GBP/USD
• Cable up to 11-day high just shy of 1.3400 after UK construction PMI beat
• 52.5 vs 52.0 f/c. Follows UK mfg PMI beat Friday (service PMI due Tuesday)
• Cable closed above10DMA for first time since April 18 on Friday (June 1)
• GBP has risen vs USD in June for 12 of the past 18 years
• EUR/GBP helped to 0.8765 European am high by M&A news
• UK-based DS Smith to buy Europac in EUR 1.9bln deal

USD/CHF
• EUR/CHF has traded 22 pip range thus far Monday, 1.1532-1.1554
• Modest range follows big moves on Italian political news last week
• IMM net CHF short up to biggest since mid-2007 in week to May 29
• Swiss referendum on a radical “sovereign money” plan Sunday (June 10)
• Polls suggest the Swiss will reject the plan

USD/CAD
• USD/CAD dropped to threaten 1.2900 during the European am
• Decline accompanied broad USD weakness. 1.2931-1.2959 was Asia range
• 1.2819-1.3047 were parameters for USD/CAD during wild week last week

AUD/USD
• More AUD/USD shorts squeezed during European am climb to 0.7650
• 0.7650 = 6wk high. Gains aided by rise in risk appetite and Aussie data
• Australian April retail sales +0.4% vs +0.2% f/c
• IMM net AUD short upped to highest since Feb 2016 in week to May 29
• More AUD shorts may cover if AUD/USD vaults 0.7660 resistance level
• 0.7660 = 61.8% of 0.7813 (April high) to 0.7413 (May’s 11-month low)

NZD/USD
• NZD/USD extended north to four-week high of 0.7037 during European am
• Gains aided by rise in risk appetite: Nikkei closed up 1.37%
• 0.7052 (May high) and 0.7100 are resistance levels

FX Options
• G10 implied vols see big paring of Italian and broader risk hedges
• Front end implied vols have fully retraced last week’s spikes
• EUR puts and JPY call premiums under pressure, back end slower to ease
• AUD/USD vols underpinned after spot gains and with RBA and GDP pending
• Big 109-110 JPY expiries and EUR/USD 1.1700-50 and 1.1800-25 this week

COMMENT

Trio of BoE MPC speakers may impact GBP this week 
Sterling may react to three slated speeches from BoE MPC members this week, beginning with Tenreyro at the University of Surrey in Guildford at 1700GMT. Tenreyro was one of the seven MPC members who voted against raising interest rates last month. Two of the other six who voted to keep the Bank Rate at 0.5%, Cunliffe and Ramsden, will speak within 72 hours of Tenreyro: Cunliffe at the Futures Industry Association International Derivatives Expo in London on Tuesday at 1000GMT; Ramsden at a Barclays inflation conference in London on Thursday at 1500GMT. Cunliffe and Ramsden were the two MPC members who voted against last November’s BoE rate hike, although Ramsden turned more hawkish in a newspaper interview published in February. The pound could benefit if the speeches from the MPC members raise the probability of an Aug 2 BoE rate hike from its current 33%. This week’s key UK data release is the Markit/CIPS service sector PMI due Tuesday at 0830GMT: 53.0 forecast.

CHART OF THE DAY

GBP/USD may find favour in June after tough May 
GBP/USD was battered in May, with the pound closing the month down a whopping 473 points, or 3.43% but there’s a good chance of a sustained recovery in June, as it is a month which usually sees cable gains. The pound’s strength in June could partly be down to shorts squaring positions after May’s seasonal selling. An analysis of GBP/USD’s June performance since the year 2000 shows it has risen in 12 of the last 18 years, closing up 0.44% on average. The failure to register a monthly close below the 1.3275 Fibo on Thursday — 38.2% retrace of the 1.1491 to 1.4377 (2016 to 2018) gain — gave bruised GBP/USD bulls some much needed respite. GBP/USD closed up 54 points on Friday after May’s above-forecast UK manufacturing PMI, having shrugged off strong U.S jobs data. If UK data improves throughout June, it will increase the chance of a BoE rate hike later this year and fuel further demand for the pound this month.

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