FX Market Update 22-8

Market Briefs

• EUR/USD -0.52%, USD/JPY 0.28%, GBP/USD -0.49%, EUR/GBP -0.04%
• DXY 0.45%, DAX 0.68%, FTSE 0.67%, Brent 0.6%, Gold -0.47%
• GB Jul PSNB Ex Banks -0.184B vs 6.249B, 0.950B f’cast
• GB Jul PSNB, mm GBP -0.760Bvs 5.673B, -0.2000B f’cast
• GB Jul PSNCR, mm -3.912B vs 18.387B
• German investor morale falls more than expected in August – ZEW
• UK factories’ output expectations highest since March as orders rise – CBI
• Swiss trade surplus widens to CHF 3.51 bln in July
• Trump commits U.S. to open-ended Afghanistan war; Taliban vow ‘graveyard’
• Japan urges pressure on North Korea as U.S. spells out choices
• Four suspected Barcelona attack plotters appear in court
• Oil prices rise on signs of tightening market
• Gold slides, palladium hits highest since 2001

Looking Ahead – Economic Data (GMT)

• 12:30 Philly Fed Nonmanufacturing Business Outlook Survey (Aug) (prev 18.1)
• 12:55 Redbook Same-Store Sales Index (weekly) (prev +2.5% y/y)
• 13:00 FHFA House Price Index (Jun) (prev +6.9% y/y)
• 14:00 Richmond Fed Manufacturing Composite Index (Aug) (prev 14)
• 14:00 Richmond Fed Service Revenues Index (Aug) (prev 12)

Looking Ahead – Events, Other Releases (GMT)

• 15:45 FedTrade operation 15-year Fannie Mae / Freddie Mac (max $475 mn)
• 18:00 Federal Reserve publishes minutes of discount rate meetings

Currency Summaries

EUR/USD

• EUR/USD drifts lower from 1.1807 to 1.1745 in Europe
• EUR/USD rallied from 1.1757-1.1828 in NA, Asia 1.1784-1.1824
• 1.1770 to session low follows a weaker than expected ZEW survey
• ZEW 10 in August from 17.5 in July and compared to a 15 f/c
• No data of note IN NA today. Support at Mon’s 1.1731 low
• Aug 18 low 1.1708. Resistance @ Mon peak 1.1828 & Aug 11 high 1.1848

USD/JPY

• Decent demand in Tokyo, extends early London, mild USD recovery aids
• Fri’s 108.61 low holds, bids 108.60-50, 108.64 Mon, 108.90-109.46 today
• Offers by Fri’s 109.60 peak, spec longs trimming positions on rallies
• Aprils 108.13 low and large 108.00 option barriers key support
• Risk reversals ease marginally, but still strong downside bias for now
• Market awaits Jackson hole so more ranging likely ahead
• 1 week vol off from 9.5-9.0 this week as dealers struggle to pay decay bills

EUR/CHF

• Volatile price action continues in USD/CHF. Now up after negative close Mon
• Continues bid in London, up 0.9637-0.9662 following Asia rebound from 0.9618
• Trades back inside the cloud on techs. Tenkan at 0.9675 & Mon 0.9685 high resist
• EUR/CHF off its best, easing in line with EUR/USD. Cross 1.1384-1.1362 last
• The 50% Fibo at 1.1261 (which propped the cross last week) is key support

GBP/USD

• On a trade weighted basis GBP matches 2017 low at 75.10
• UK public finances show first July surplus since 2002
• GBP 1.2842-1.2860 rise in reaction but fails to hold gains
• Slow drift lower reaches 1.2826 ahead NA session
• A close below the daily Ichimoku cloud base at 1.2858 would be bearish
• On TWI basis, 74.70 next level of note, was trading at time U.S. election

USD/CAD

• Commods weaker vs USD early London, lifts USD/CAD
• 1.2549 to 1.2581. 1.2549 a new lows since 2 Aug (1.2553 Mon)
• Resistance 21DMA 1.2607 and Mon’s 1.2608 peak, 400mln 1.26 expiry
• Bit of a decoupling with oil as WTI holds mid of Fri/Mon range
• Jackson hole keeps a bid under 1wk vol but vols lack demand
• 1mth gets Sept FED and holds mid 7’s – fair value ve hourly realised

AUD/USD

• AUD/USD lower, helped by mild USD recovery
• 0.7943-10 from 0.7951 Asia peak – 0.7950 was Mon’s high
• Breaks hourly cloud support 0.7919-16, 100DMA 0.7915
• Mon’s 0.7912 low. Next support 10DMA/tenkan-sen 0.7892/85
• Dip buyers noted, but volumes low. 21dma 0.7926 remains pivotal

NZD/USD

• 0.7319/0.7335 Asia range, capped by Mon’s 0.7337 high
• Under pressure beside AUD/USD early London amid mild USD recovery
• Breaks Mon’s 0.7305 low and 10DMA 0.7299 for 0.7293 (200HMA)
• Daily cloud top 0.7283 and Fri’s 0.7278 low next support
• Minor recovery since as intraday specs lean on key support

FX OPTIONS

• EUR/USD Friday vol 9.0/76 pips, 1 week 8.5/110 pips in to Jackson hole
• 1mth vols in USD pairs underpinned since Monday by Sept FOMC capture
• USD/JPY risk reversals off highs but retain firm downside bias
• April lows 108.13 and big 108.00 barriers are risk – short gamma below
• AUD and NZD vols suffer. GBP vols lack demand as ranges hold
COMMENT

BoE – For rate hike risks watch GBP bears

Cable might be off its lows of last year but its recovery has stalled and recently there has been a setback as the unit trades back below 1.30. However, it is worth remembering that GBP sentiment remains negative 1) against the USD it has the lowest gain so far this year compared to other major G10 currencies; and 2) on a broader TWI basis GBP has this week matched January’s YTD low.
It is easy to explain bearishness on GBP given the asymmetric risks associated with Brexit negotiations and that the BoE is unlikely to tighten monetary policy while other major central banks are acting hawkishly. Whether it’s corporate hedging, speculative activity or longer term positioning, the bias is at the very best not to be bullish GBP.
This is not a battle that is one sided even if the GBP bears are having a greater influence on the price action compared to GBP bulls. Over the course of the last few weeks IMM positioning has seen a build-up of GBP longs as well as GBP shorts leading to an increase in net short positions. GBP shorts are being built more aggressively and current positions are still some 50k contracts below the highs seen in April and March.
With GBP longs unlikely to be built any further, it is likely that the rebuilding of GBP shorts will dominate the price action. How GBP behaves is important to the BoE outlook. While we see the BoE on hold for the next 2 years at least, the risk to an unchanged BoE is if GBP weakens sharply and this weakness is related to diverging monetary policy which might force the BoE’s hand on rates.

CHART FOCUS

USD/TRY bears target June low

USD/TRY finally has June’s 3.4750 base in its sights following the close under the 76.4% Fibo of June to July 3.4750 to 3.6470 rise at 3.5156. The Fibo had been pierced three times previously, on July 19 and August 1 and 18, but had not managed to sustain the break and close below until now. As a result the path is now open for a full retracement to the aforementioned 3.4750 base. On the longer term charts USD/TRY has been inching through the weekly cloud since the middle of July and the base at 3.3659 is a viable medium term target. Closer to market could see some corrective action, and a cloud twist out on August 29 may exert some influence, but as long as spot can hold below the broken 3.5156 Fibo the fall looks set to resume.

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