FX Market Update 12-6

Market Briefs
• EUR/USD 0.11%, USD/JPY 0.11%, GBP/USD 0.17%, EUR/GBP -0.06%
• DXY -0.06%, DAX -0.14%, FTSE -0.4%, Brent 0.39%, Gold -0.12%
• Trump, Kim agree on denuclearisation, but deal seen symbolic
• China suggests N.Korea sanctions relief as Trump, Kim meet
• DE ZEW Economic Sentiment, -16.1, 14 f’cast, -8.2 prev
• DE ZEW Current Conditions, 80.6, 85 f’cast, 87.4 prev
• German upswing remains robust despite U.S. tariff threat -OECD
• GB Claimant Count Unem Chng, -7.7k, 31.2k prev
• GB ILO Unemployment Rate, 4.2%, 4.2% f’cast, 4.2% prev
• GB Employment Change, 146k, 110k f’cast, 197k prev
• GB Avg Wk Earnings 3M YY, 2.5%, 2.6% f’cast, 2.6% prev
• FR Non-Farm Payrolls Rev, 0.20%, 0.30% prev
• OPEC will squeeze oil buffer to historic lows with an output hike
• In Brexit showdown, British PM May faces issue of “meaningful vote”
• With rate hike in the bag, focus turns to Fed’s policy language
• Gold dips on strong dollar post Trump-Kim meeting; Fed in focus
• Oil edges up, but bulls remain wary ahead of OPEC meeting

Looking Ahead – Economic Data (GMT)
• 12:30 US Core CPI YY, NSA, 2.2% f’cast, 2.1% prev
• 12:30 US CPI YY, NSA, 2.7% f’cast, 2.5% prev
• 12:55 US Redbook YY, 4% prev

Looking Ahead – Events, Other Releases (GMT) 
• N/A U.S. Federal Reserve’s Federal Open Market Committee starts in Washington
• 14:00 Senate Committee votes on the nominations of Richard Clarida to be Fed vice chairman and Michelle Bowman to be a member of the Fed Board of Governors in Washington

Commentaries and Analyses

EUR/USD up in Europe as rates lend the euro a hand (nL1N1TE0AO) 
• EUR/USD soft in Asia trading lower within a 1.1803-1.1741 range
• Pair supported in Europe rising 1.1757-1.1809
• Interest rate mkts ahead FED/ECB shift in support of a higher EUR/USD
• US/German 10-year spread narrows to 245bp, tightening by 14bp since end-May
• Further 1bp tightening would take spread to narrowest since mid-May
• EUR 8 shorts estab since start May. Break 1.1840 or 1.1700 will excite

USD/JPY, sold in Ldn after US-NK summit, vulnerable to squeeze (nL1N1TE0AM)
• USD/JPY selling in late Asia, throughout Ldn could see short squeeze from NY
• Few details on how NK denuclearisation will be achieved weighs on USD/JPY
• USD/JPY rose from 110.00 to hit 110.49 in Asia, ahead of the easing in Ldn
• Bulls had earlier leapt over 200-DMA to focus on key Fibo
• Japanese exporter offers said to be in size at 110.50 and above
• Widening UST-JGB spread underpin USD/JPY bulls ahead of Fed

GBP/USD reclaims 1.34 handle after dip on UK earnings miss (nL1N1TE095) 
• Cable fell to 1.3380 in knee-jerk reaction to below f/c UK earnings data
• Headline earnings +2.5%, ex-bonus earnings +2.8%, both 0.1% below f/c
• Larger than expected rise in employment is silver lining for GBP bulls
• 146k vs 110k f/c. ILO jobless rate 4.2%, as expected
• Rally from 1.3380 topped out a pip shy of 1.3419 (pre-UK data high)
• 1.3343 was early Europe one-week low. 1.3345-1.3441 was Monday’s range

AUD/USD elicits support from ‘positive’ Trump-Kim summit (nL1N1TE08R)
• Risk-sensitive AUD ticks up to 0.7623 vs USD after Trump/Kim summit
• Trump, Kim sign agreement but few specifics
• 0.7621 was Asia high and Monday’s high. 0.7627 was last Friday’s high
• Interim low between Monday’s high and Asia high was 0.7584
• AUD/USD could extend north if US CPI data softer than expected at 1230GMT
• US CPI f/c +0.2% MM, +2.7% YY. Core CPI f/c +0.2% MM, +2.2% YY

Higher USD yield, RBNZ to sap NZD/USD strength 

With U.S. interest rates about to become the highest of all in developed markets and risk appetite underpinned by the U.S.-North Korea agreement, the dollar is looking an attractive buy especially against the New Zeland dollar. A potentially dovish RBNZ at the end of the month and the fact that speculators are short of the greenback versus the kiwi may makes this the best dollar long play. This week the Fed Funds target is expected to rise to 2%, making the dollar’s yield the highest within developed FX markets and with stocks holding their long-term uptrends and vols in FX majors low, that big carry is going to attract a lot of demand. On the flip side, the new RBNZ Governor Orr struck a dovish tone at his first meeting on May 10 and with NZD/USD around 1% stronger than it was on May 10, the RBNZ is almost certainly going to repeat that dovish view on June 27. The 55-DMA at 0.7089 and daily Ichimoku cloud 0.7100-0.7175 provide strong resistance to sell against.

Widening UST-JGB spread spur USD/JPY bulls ahead of Fed  
The U.S. Federal Reserve is widely expected to raise interest rates for the second time this year, the focus is on whether the central bank will hint at raising rates a total of four times in 2018 which would spur USD/JPY gains. Meanwhile, the BoJ is widely to maintain its loose monetary policy on Friday. The 10-year UST-JGB yield spread will therefore likely remain a key influence over USD/JPY in coming days. The relationship (30-day log correlation) between USD/JPY and the UST/JGB spread since May 9 has been above +0.50, the threshold which means the two variables register a daily close in the same direction more often than not. Increased risk appetite in recent days in the run-up to today’s Trump-Kim summit, saw USD/JPY vault the 200-DMA at 110.19. Though Trump, Kim signed an agreement after the summit it had few details on how denuclearisation will be achieved, capping pressure on the safe-haven yen. If the 10-year UST-JGB yield spread continues to widen, this will help secure a USD/JPY bullish daily close above the 200-DMA.

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