FX Market Update 17-8

Officials expressed concern over risk of Euro overshoot
– Generally judged paramount to avoid signals that might prove premature and prone to over-interpretation (suggestion was made for consideration be given to adjustment in language)
– Accommodation determined by all tools, not just duration and pace of bond buying
 – Headline inflation slightly lower than previously expected due to oil and exchange rates
– Core inflation shows tentaive signs of pick-up but still need evidence of upward trend
– Asset purchases to remain key tool – More favorable growth outlook increases confidence that inflation will gradually converge to target; expansion was increasingly self-sustaining
– Favorable financing conditions can not be taken fr granted; risk that conditions could tighten to unwarranted degree

Market Briefs

• EUR/USD -0.54%, USD/JPY flat, GBP/USD -0.21%, EUR/GBP -0.35%
• DXY +0.36%, DAX flat, FTSE -0.29%, Brent -0.14%, Gold +0.11%
• U.S. says joint S.Korea war games not on the negotiating table
• Britain confident of making progress in Brexit talks by Oct
• German employment hits record, home building permits fall
• GB Jul Retail sales mm +0.3% vs 0.6%, rvsd +0.3%, f’cast 0.2%
• GB Jul Retail sales yy +1.3% vs 2.9%, rvsd +2.8%, f’cast 1.4%
• EZ Jul Inflation final mm -0.5% vs 0%, f’cast -0.5%
• EZ Jul Inflation final yy 1.3% vs 1.3%, f’cast 1.3%
• JP Jul Exports +13.4% vs f’cast +13.6%
• Oil steady as high U.S. output balances crude stock draw
• Gold rises on Fed caution, palladium hits 16-year peak

Looking Ahead – Economic Data (GMT)

• 12:30 Initial Jobless Claims (w/e Aug 12) (mkt 240k, prev 244k)
• 12:30 Continued Claims (w/e Aug 5) (mkt 1.953 mn, prev 1.951 mn)
• 12:30 Philly Fed Manufacturing Survey (Aug) (mkt 18.5, prev 19.5)
• 13:15 Industrial Production (Jul) (mkt +0.3% m/m, +0.4% m/m)
• 13:15 Factory Output (Jul) (mkt +0.2% m/m, +0.2% m/m)
• 13:15 Capacity Utilization (Jul) (mkt 76.7%, prev 76.6%)
• 14:00 Leading Economic Indicators (Jul) (mkt +0.3% m/m, prev +0.6% m/m)
• 14:00 E-Commerce Retail Sales (Q2) (prev +4.1% q/q AR)

Looking Ahead – Events, Other Releases (GMT)

• 17:00 FRB’s Kaplan in Q&A session at chamber of commerce event; Lubbock, TX
• 17:45 FRB’s Kashkari in Q&A session at Rotary Club event; Edina, MN
• 18:30 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $2.125 bn)

Currency Summaries

EUR/USD

• EUR/USD sinks throughout Europe’s session without an obvious spark
• Opens 1.1779 and trades as low as 1.1695
• Steady but one-way movement contrasting Wed’ s rally in NA session
• Strong buying anticipated below 1.1700 but stops of note below 1.1680
• EUR 2 billion vanilla options today 1.1700-15
• Big swing without news will doubtless influence unwinding & traders are long

USD/JPY

• USD/JPY edges back above 110.00 reaching 110.20 best in Europe
• Cross JPY fares badly, EUR/JPY -0.54%, GBP/JPY -0.25% & CHF/JPY -0.15%
• Likely the influence of large and unprofitable speculative JPY shorts
• Many risks to warrant an unwind, N Korea, Trump woes & Fed’s inflation worry
• USD 2.8 billion vanilla options expiries 110.00-20 should anchor spot

EUR/CHF

• USD/CHF continues to retreat on broad USD weakness after Wed FOMC minutes
• 0.9671-0.9624 European range, brking back under Ichi cloud (base at 0.9649)
• Last wk’s 0.9583 low is now in sight & important for the next directional bias
• EUR/CHF off sharply as well, plays 1.1375-1.1315, below the 21-DMA at 1.1327
• 1.1261 low & 50% Fibo there the key support if risk comes off more

GBP/USD

• Cable tested 1.2909 (Asia high) after UK ONS retail sales data at 0830GMT
• July retail sales +0.3% vs +0.2% f/c but June revised down 0.3% to 0.3%
• Cable revisited 1.2880 (early Europe low) as June revision digested
• EUR/GBP extended south from 0.9134 to 0.9096 after UK retail sales data
• 0.9134 = early Europe high. 0.9107 = pre-UK retail sales data low
• Cross scaled new 10mth top for 7th out of past 10 trading days Wednesday

USD/CAD

• Half-cent rise for USD/CAD since early Europe 13-day low of 1.2588
• Profit-taking on shorts mooted as factor in rise: 1.2770 was Tuesday’s high
• Goldman Sachs went short USD/CAD Wednesday, 1.30 stop, 1.20 target

AUD/USD

• AUD/USD met headwind pre-0.7967 after vaulting 0.7951 (Asia high)
• 0.7967 = 61.8% of 0.8066 (July 27 high) to 0.7808 (Tuesday’s low)
• AUD gains aided by broad-based rally in metals WednesdayThursday
• Huge 0.7975 option expiry for 10am ET NY cut, AUD 2bln strike

NZD/USD

• NZD/USD fell from 0.7335 (1wk high) to 0.7302 during the European am
• AUD/NZD extended north to 1.0879 during the European am
• 1.0879 = fresh 15wk high. 1.0866 was Wednesday’s high

FX OPTIONS EXPIRIES

• EUR/USD 1.1700-15 (1.97BLN), 1.1750-60 (1.1BLN) 1.1795-00 (2.67BLN)
• USD/JPY 110.00-05 (1.81BLN), 110.20-30 (1.02BLN), 110.75-80 (1.438BLN
• EUR/JPY 129.40 (294M), 129.55 (169M)
• GBP/USD 1.2975 (292M), 1.3075 (361M), 1.3200 (460M)
• EUR/GBP 0.9000 (330M), 0.8875 (300M)
• AUD/USD 0.7875 (1.37BLN), 0.7975 (2BLN)
• NZD/USD 0.7350 (361M), 0.7275 (200M), 0.7200 (431M), 0.7150 (302M)

COMMENT

S.African assets regain favour but hurdles loom?

South Africa’s currency, stocks and bonds are on the rise Thursday as investors warm slightly to the country’s assets after a clutch of upbeat economic data but the reprieve for the rand may be shortlived. The rand has recovered 3% versus the USD since Aug 9 and 10-year S.Afrcan government bond yields have fallen 15bps since Aug 10 as investors navigate a path through political and credit rating tension. The near-term outlook favours the rand but the speed and magnitude of USD/ZAR reversals on bad news tend to put a brake on bull trends. The current positive sentiment is also being helped by uncertainty surrounding the U.S rate outlook following the latest Fed minutes. However, the S.African economy still faces an up-hill struggle out of recession and Moody’s latest country outlook was far from positive. A cautious approach is needed with an eye on potential longer-term hurdles.

CHART FOCUS

Cable bears look to weekly cloud for help

Downside risk remains for cable and bears look to target the weekly cloud base at 1.2406. Prices have been easing through the cloud since the rejection from the top at 1.3267 on Aug 3. On the daily charts, some recovery action is underway after failing to close inside the daily cloud on Wednesday. The correction provides those not already playing the short side an opportunity to sell at better levels. The 55-DMA is an expected stall point at 1.2931 and a good place to offer. Cable bears are hopeful of a break of the 100-DMA at 1.2868 and the daily cloud, which spans 1.2864-1.2819 today, into the week’s close for a fresh assault lower next week. The weekly Kijun line provides support at 1.2689 ahead of our 1.2406 bearish objective.

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