FX Market Update 16-8

Market Briefs

• EUR/USD -0.22%`, USD/JPY +0.17%, GBP/USD +0.06%, EUR/GBP -0.31%
• DXY +0.14%, DAX +0.9%, FTSE +0.66%, Brent +0.67%, Gold -0.17%
• ECB’s Gov Draghi wants to delay policy debate until the Autumn – Rtrs
• EZ Q2 GDP flash qq 0.6% vs 0.6%, f’cast 0.6%
• EZ Q2 GDP flash yy 2.2% vs 2.1%, f’cast 2.1%
• U.S.-Japan conduct air drills as N.Korea watches “Yankees'” next move
• GB Jun ILO Unemployment rate 4.4% vs 4.5%, f’cast 4.5%
• GB Jul Claimant count unemp chang -4.2k vs 5.9k, f’cast 3.7k
• Gold treads lower ahead of Fed minutes
• Oil edges up on falling US crude stocks, but global glut weigh

Looking Ahead – Economic Data (GMT)

• 11:00 MBA Weekly Mortgage Application Indices
• 12:30 Housing Starts (Jul) (mkt 1.220 mn SAAR, prev 1.215 mn SAAR)
• 12:30 Building Permits (Jul) (mkt 1.248 mn SAAR, prev 1.246 mn SAAR)
• 14:30 EIA Weekly Petroleum Status Report

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $475 mn)
• 18:00 FOMC Minutes (for meeting held July 25-26)

Currency Summaries

EUR/USD

• EUR/USD opened softly in Europe & hit session lows after German GDP
• Q2 German growth slows, 0.8% yy from 1.7% f/c was 1.9%
• EUR/USD briefly trades 1.1721. 21-DMA 1.1733 is pivotal on closing basis
• EUR 1.3bln 1.1780-85 vanilla likely cap but also possible magnet
• EUR longs vulnerable to weaker techs and data
• Bonds suggest EUR/USD top is in ahead Sept ECB:

USD/JPY

• USD/JPY and JPY complex buoyant, on hold near tops seen yesterday
• European traded sees 110.64 to 110.95 and softer into NY at 110.80
• US Treasury yields up o/n before steadying, US data strong
• Effect of N.Korea back-off on threats over for now, lazy O-Bon Tokyo again
• JPY bias down but medium-term shorts cap USD/JPY upside pre-111.00
• Bidding interest on dips from around 110.50

EUR/CHF

• USD/CHF higher in Asia as safe havens reverse & USD gains then lower
• 0.9758 European high then pullback to 0.9703
• Fri’s Doji reversal signal & cloud break Mon were bullish signals
• Scope to 100-DMA at 0.9782 & Ichi cloud top at 0.9827 remains on the charts
• EUR/CHF offf its best as well. 1.1478-1.1410 but buyers ermege ahead of 1.14
• Swiss producer/import prices down 0.1 pct yr/yr in July

GBP/USD

• Cable rose half-a-cent to 1.2903 after UK earnings data beat at 0830GMT
• Earnings up 2.1% vs +1.8% f/c, ex-bonus earnings +2.1% vs +2.0% f/c
• 1.2842 was fractionally fresh 5wk low pre-UK data (1.2846 = Tuesday low)
• EUR/GBP extended south from 0.9144 to 0.9084 on UK earnings beat
• 0.9144 = early Europe 10mth top pre-Draghi/Jackson Hole piece from Reuters

USD/CAD

• USD/CAD dropped to threaten 1.2720 during the European am
• 1.2720 was Tuesday’s low–before rise to 1.2778 (5wk high)
• USD/CAD threatened 1.2778 in Asia. Offers touted near 1.2800

AUD/USD

• AUD up in value during European am amid greater risk appetite
• AUD/USD rose to 0.7865 with AUD/NZD up to threaten 1.0862
• 1.0862 was 3mth high last week. 0.7816 = AUD/USD low in Asia
• Large AUD/USD 0.7875 option expiry Thursday, AUD 1.3bln strike

NZD/USD

• 0.7254 = European am high for NZD/USD after 5wk low of 0.7224 in Asia
• European am high approximates to last week’s low (after RBNZ jawboning)
• AUD/NZD extended north to threaten 1.0862 during the European am
• 1.0862 = 3mth high last week (Aug 10). 1.0806 was Asia low
• Large 1.0900 option expiry next Monday (Aug 21), AUD 609mn strike

FX OPTIONS

• EUR/USD 1.1600 (1.245BLN), 1.1750 (300M), 1.1760 (358M)
• USD/JPY 109.90 (805M), 110.25 (230M), 110.45-50 (814M)
• EUR/JPY 130.50 (253M) EUR/NOK 9.35 (478M)
• EUR/SEK 9.50 (283M)AUD/USD 0.7830 (1.86BLN) 0.7850 (910M)
• NZD/USD 0.7320 (437M)

COMMENT

Currency strength to help cement 3P’s

A stronger EUR is unwelcome due to its dampening effect on inflation but it is not going to prevent the ECB from exiting extraordinary loose monetary policy during 2018. Instead it will help to cement the ‘persistent, patient and prudent’ stance (3P’s) to the policy outlook and the exit.
On a trade weighted basis, the EUR has appreciated around 3.5% since the ECB’s June meeting. It is some 2.5% from its 2014 peak that was used by Draghi at the time to point to a factor that had been weighing on inflation. Once again the stronger EUR will weigh on inflation but unlike the events that led the ECB on a QE/NIRP journey things are different 1) the eurozone economy is stronger; 2) fragmentation is lower and credit supply improved; 3) corporate and government bond yields are lower; and 4) monetary policy is very accommodative.
Monetary policy is excessively loose despite the latest bout of currency strength and the need to exit from loose policy will dominate. What the stronger EUR will do is to help to cement the ECB’s message that when it comes to the policy outlook there is a need for a ‘persistent, patient and prudent’ stance. There will be no calendar based dash for the exit but a desire to shift gears very slowing on policy. The volatility of oil and EUR will be seen as temporary factors with longer term inflation forecasts used to signal optimism over the medium-term inflation outlook.

CHART FOCUS

USD/JPY bulls bracing for a fresh charge

USD/JPY looks set for a rebound with the bull charge led by a possible engulfing line on the weekly candles. For the initial part of the signal to complete, USD/JPY needs to close on the week above 110.69. The weekly cloud base and lower 30-WMA Bollinger are providing solid support at 108.83-65 but 200-WMA could stall if not reject the price at 111.44. There is also the risk that USD/JPY pans out sideways near-term within the 108.83-112.23 weekly cloud as momentum readings remain low. Dailies took off sharply from the Aug 11 morning star doji and the price is nearing a 38.2% Fibo at 110.92, off the 114.49 July 11 top and 108.72 Aug 11 drop. The initial target for a long play is at the 50% Fibo of this move at 111.60. Note, the daily cloud base is at 111.65 and there is a twist at the level out to Sept 6

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