FX Market Update 31-8

Market Briefs

• EUR/USD 0.03%, USD/JPY 0.34%, GBP/USD -0.36%, EUR/GBP 0.35%
• DXY 0.13%, DAX 0.57%, FTSE 0.63%, Brent 0.22%, Gold -0.24%
• EZ Aug Inflation, Flash YY 1.5% vs 1.3%, 1.4% f’cast
• EZ Aug Infl Ex food & Enr Flash 1.3% vs 1.3%, 1.2% f’cast
• EZ Jul Unemployment 9.1% vs 9.1%, 9.1% f’cast
• DE Jul Retail Sales mm Real -1.2% vs 1.1%, 1.3% r’vsd, -0.4% f’cast
• DE Jul Retail Sales yy Real 2.7% vs 1.5%, 2.6% r’vsd, 3.5% f’cast
• DE Aug Unemployment Chg SA -5k vs -9k, -6k f’cast
• ECB unease over firmer euro risks slowing asset purchase exit –sources
• Strong Euro is worrying a growing number of ECB policymakers – sources
• U.S. bombers drill over Korean peninsula after latest N.Korea launch
• Global fuel market prices jump as Harvey’s impact spreads beyond U.S. Gulf
• BoE’s Saunders: Unwinding QE would not be first means of tightening policy
• BoJ’s Masai: Still far from CPI target but momentum building
• SNB’s Maechler: Swiss franc weakening welcome but fragile
• U.S. oil prices set for worst month in over a year as floods hit demand
• Gold eases as dollar gains on strong economic data

Looking Ahead – Economic Data (GMT) 

• 12:30 US Initial Jobless Claims (w/e Aug 26) (mkt 236k, prev 234k)
• 12:30 US Continued Claims (w/e Aug 19) (mkt 1.950 mn, prev 1.954 mn)
• 12:30 US Personal Income (Jul) (mkt +0.3% m/m, prev 0.0% m/m)
• 12:30 US Personal Consumption Expenditures (Jul) (mkt +0.4% m/m, prev +0.1% m/m)
• 12:30 US Core PCE Price Index (Jul) (mkt +0.1% m/m; prev +0.1% m/m, +1.5% y/y)
• 13:45 US Chicago PMI (Aug) (mkt 58.5, prev 58.9)
• 14:00 US Pending Home Sales Index (Jul) (mkt 110.8, prev 110.2)

Looking Ahead – Events, Other Releases (GMT)

• 18:30 Fed Trade operation 30-year Fannie Mae / Freddie Mac (max $2.05 bn)

Currency Summaries

EUR/USD

• EUR/USD 1.1867-1.1906 range in Europe after 1.1867-03 Asia
• Move to the high followed small upside surprise for EZ CPI
• August Flash inflation 1.5% yy v 1.4% f/c and a prior 1.3%
• Resistance @ Aug 2 high 1.1910 untroubled by data reaction
• 100-HMA @ 1.1937 potentially pivotal above
• dips to 1.1845 after ECB source says strong EUR worrying policy makers

USD/JPY

• USD/JPY set for gains to 111.60 due to cloud twist. Range 110.20-66
• While offers seen all the way up to 111.00, stops clustered above level
• Bids layered between 110.00/20 region which has propped so far
• Month-end demand and toshin propels USD/JPY higher in Asia
• UST-JGB spreads relationship with USD/JPY across curve breaking down
• Spreads not widening much, most 30/60-day log correlation now below +0.50

EUR/CHF

• USD/CHF recovery extends to a new high at 0.9646 from 0.9623 early Europe low
• U.S data the past 2 days has been USD supportive thus USD/CHF is higher
• The rise in spot is testing very close to the cloud top at 0.9649
• Above targets 38.2% Fibo of the 2017 drop at 0.9774, also by early Aug highs
• EUR/CHF up to new high in Europe. Plays 1.1437 to 1.1472
• Very close to Aug 15 high at 1.1478. 1.1537 multi-year high is the next hurdle

GBP/USD

• GBP on the back foot in Europe likely due to month-end flows
• Several banks tip moderate dollar buying for end-August
• EUR/GBP buying is also widely anticipated today
• EUR/GBP 0.9187-0.9233 rise in Europe
• Saunders thinks small rises now avert need to rush hikes later
• Saunders: Recent moves reflect Europe’s strength over weaker GBP

USD/CAD

• 200 week MA looks safe at 1.2433. Decent bounce from Tues 1.2440 low
• USD recovery certainly playing its part, extends Wed’s 1.2635 high
• 1.2619-1.2663 todays range, 21DMA 1.2621 now support
• Next resistance 18 August daily high 1.2691 and daily cloud base 1.2717
• 76.4% fibo of recent 1.2778-1.2440 drop comes in at 1.2698
• Option vols/CAD puts higher this week. Friday/NFP vol break even 65 pips

AUD/USD

• AUD/USD 0.7923-0.7886 range, AUD 929mln 0.7895 expiry Friday NY cut
• Strike helps draw spot as delta hedging dominates
• 21DMA 0.7908 pivotal last 2wks. USD recovery adding weight Wed/Thur
• AUD/USD losses limited by strong AUD/NZD gains
• Cross breaks 1.1020 March hi for 1.1045, n/t potential for Mar 2016 high 1.1335
• AUD vols underpinned by spot setback but lack demand as ranges hold

NZD/USD

• NZD/USD new low since 6 June, 0.7210-0.7145 todays range
• AUD/NZD break above March high 1.1020 for 1.1045 adding weight
• Next key levels 25 Apr 2016 peak 1.1274 before March 2016 high 1.1335
• Set to close above 55 month MA 1.0934 (not seen since 2012)
• Cross also now within monthly cloud for first time since 2013
• NZD trades below daily cloud base at 0.7220, which turns to resistance
• 100DMA breached at 0.7182 and now eyes 200DMA 0.7131
• 55week MA 0.7152 and weekly cloud top 0.7133 key for close Friday
• Option vols/NZD puts in demand, especially 1mth over election/RBNZ

FX OPTIONS

• Event risk and decent spot ranges help support vols for now
• NFP Friday and 1 week gets ECB and BoC. Huge 1.1850-1.20 EUR expiries
• EUR/USD sees mild paring of topside longs, huge trade 1mth risk reversals
• USD/JPY vols well supported but risk reversals ease as d/side risk recedes
• NZD vols and puts bid on spot weakness, 1mth gets election/RBNZ

COMMENT

USD/JPY likely to sink after payrolls data

Based on trading patterns around non-farm payrolls data, it’s prudent to sell USD/JPY. The data is usually preceded by a run up for U.S. rates but followed by a dump in rates and a lower dollar. July and August built on a trend evident in the first six months of this year, see. Indeed July saw this pattern exacerbated with a much bigger than usual rise in rates between June 2and release day on July 7 with USD/JPY rising 110.95 to 114.18. However USD/JPY only managed a further 31 pip rise in 4 days after strong data and then fell close to 5 yen before the August data. In August rates barely rose before Aug 4 release day and USD/JPY shed close to 3 yen by August 29. Fed funds hit news lows this week and only rose 1bp after ADP data, while USD/JPY has rallied almost 2 yen. Traders should brace for another sell-off.

CHART FOCUS

AUD/NZD could fully retrace 2015-2016 drop

Long term AUD/NZD technicals maintain a positive bias and favor a full retracement of the 2015-2016 drop. There are potentially bullish signals on the monthly charts: the cross looks set to close the month above the 55-MMA at 1.0934 for the first time since 2012 and within the monthly Ichi cloud for the first time since 2013. If the signals are correct then AUD/NZD bulls are hopeful for a break of the 76.4% Fibo of the 2015 to 2016 1.1450 to 1.0237 drop at 1.1164. Any such break could then bring the August 2015 1.1450 peak into play. Nearer term the cross has run into resistance around the upper 30-D Bollinger by 1.1040. Historically the Bollinger bands contain price and could now see some corrective action kick in. The 30-DMA at 1.0793 is a likely stall point for any move lower and pullbacks are viewed as an opportunity to join the bull trend. The 10-DMA provides closer to the market support at 1.0936.

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