FX Market Update 11-6

Market Briefs

• EUR/USD 0.24%, USD/JPY 0.42%, GBP/USD -0.31%, EUR/GBP 0.55%
• DXY 0.01%, DAX 0.48%, FTSE 0.7%, Brent -0.94%, Gold -0.18%
• N.Korean, U.S. officials air differences on eve of summit; Trump stays positive
• “Fair trade, fool trade”, Trump’s tweets spew ire on NATO allies, Trudeau
• GB Apr Industrial Output YY, 1.8%, 2.7% f’cast, 2.9% prev
• GB Apr Manufacturing Output MM, -1.4%, 0.3% f’cast, -0.1% prev
• GB Apr Manufacturing Output YY, 1.4%, 3.1% f’cast, 2.9% prev
• GB Apr Goods Trade Balance (GBP), -14.04 bln, -11.35 bln f’cast, -12.29 bln prev
• Britain’s May to urge Conservative unity before parliament’s votes
• Mexico minister calls for ‘flexibility’ in reworking NAFTA
• Bitcoin tumbles as hackers hit S.Korean exchange Coinrail
• Oil prices slip as U.S. and Russian supplies grow
• Gold dips on uncertainty about Fed, U.S.-N.Korea summit

Looking Ahead – Economic Data (GMT) 
• 15:00 New York Fed Survey of Consumer Expectations (May)

Looking Ahead – Events, Other Releases (GMT) 
• 15:00 Angela Merkel meets heads of the IMF, WTO, the World Bank, the ILO and the OECD for talks in Berlin
• 15:45 FedTrade operation taking 30-year Ginnie Mae (max $510 mn)
• 17:20 German Finance Minister Peter Altmaier speaks at opening of CEBIT Business Fair for Innovation and Digitization

Commentary and Analysis

EUR/USD rally loses momentum as focus turns to Fed (nL1N1TD07Q)

• Italy vow to stay in euro boosts EUR/USD to 1.1821 in Europe
• Italy 10-year yield currently down 22bp on the day at 2.91%
• EUR/USD rally loses momentum with pair dropping to 1.1790 ahead NA open
• Those short are pinning hopes coming Fed hike boosts USD Wednesday
• However, the weaker euro is certain fuel for ECB hawks on Thursday
• Over 1.1845 may spark squeeze. Bears need sub 21-DMA 1.1738

USD/JPY sees biggest one-hour gain of June as risk rebounds (nL1N1TD06I)

• Asia saw USD/JPY’s biggest on one-hour gain of June in Asia as NK is focus
• Ldn subsequently builds on this to register the fourth latest one-one gain
• Wider 10-yr UST-JGB spread also fuelling USD/JPY’s latest rise
• USD/JPY bulls rebound to focus once again on the 200-DMA
• Japanese exporter offers remain in size above 110.00, could limit gains
• Officials air differences on US-NK summit eve; Trump positive

Sterling hurt by very disappointing UK economic data (nL1N1TD06X)

• GBP/USD down to 1.3361 intra-day low on much worse than expected UK data
• Apr mfg output -1.4% vs +0.3% f/c, biggest drop since Oct 2012 nL4N1TD2Y7
• Industrial output -0.8% vs +0.2% f/c. Construction output +0.5% vs +2.0% f/c
• Goods trade deficit GBP 14.035bln vs 11.35bln f/c, widest since Sept 2016
• Data misses are blow for hawks advocating BoE rate hike on Aug 2
• 1.3441 was early Europe high (pre-UK data). 1.3355 was Friday’s low

AUD/USD supported by rise in risk appetite pre-Trump/Kim (nL1N1TD07Y)

• AUD/USD elicited fresh support pre-0.7600 after retreating from 0.7616
• 0.7616 was European am high. 0.7602 was pullback low from 0.7614 Asia high
• Ascent to 0.7614 spurred by rise in risk appetite: Nikkei closed up 0.48%
• 0.7575 was early Asia low after tense weekend G7 meeting
• Trump-Kim summit in Singapore Tuesday, AUD could react to it
• 0.7560 was AUD/USD low Friday on decline in risk appetite

COMMENT

May’s Brexit test to dictate GBP/USD’s direction 
Cable could rise towards 1.36, a key technical level, if Tory PM May successfully navigates a tricky week in the UK parliament, when MPs will be voting on the shape of Brexit. May will today continue efforts to persuade rebel MPs to back her government, ahead of House of Commons votes on Tuesday and Wednesday. Pro-EU Tory MPs have to reflect on the fact that shooting May’s Brexit plan down could weaken her leadership and result in a “hard” Brexiteer succeeding her in number 10 ahead of Britain’s scheduled EU exit in March 2019. Sterling could fall sharply if that came to pass. Ladbrokes currently quotes 11/8 for May to be replaced as PM this year versus 2/1 seven days ago. Ladbrokes and Paddy Power make prominent eurosceptic Michael Gove the favourite to be the next Tory leader, with William Hill making ardent Brexiteer Jacob Rees-Mogg the favourite. 1.36 approximates to cable’s 200-day moving average.

S.Africa rand could see brief reprieve post-Fed
Like other emerging market FX, the South African rand is at the mercy of the Fed and ECB meetings this week though an overbought USD/ZAR could be ripe for a pullback. An FOMC interest rate rise is already heavily discounted but there’s still room for a post-hike knee-jerk rally in USD/ZAR should the Fed up the hawkish rhetoric. However, price action since last week’s topside break-out has tipped the charts into overbought territory and a retreat may be on the cards after the FOMC. A drop back inside the 30-DMA Bollinger envelope 13.0105 could be a viable objective with the daily tenkan at 12.87 offering value. Any pullback though would provide an opportunity to pick up dollars at cheaper levels before the fundamental backdrop takes the rand lower again

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