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US FX Market Open –Friday, July 20, 2016: BoJ talk and UK data shaping a GBP/JPY sell

Posted by Marge Maresca on Jul 22, 2016 11:17:19 AM


Overnight Events

• Sterling hit by weak PMI data-Cable loses over 100-pts
• GBP/USD -0.85%, USD/JPY +0.4%, EUR/USD -0.07%
• DXY +0.17%, DAX -0.1%, Brent -0.13%, Iron -1.0%
• DE Flash Jul Mfg PMI 53.7 vs 54.5 prev, 53.5 exp
• DE Flash Jul Service PMI 54.6 vs 53.7 prev, 53.2 exp
• EZ Flash Jul Mfg PMI 51.9 vs 52.8 prev, 52.0 exp
• EZ Flash Jul Service PMI 52.7 vs 52.8 prev, 52.3 exp
• UK Jul Mfg PMI 49.1 vs 52.1 prev, 50.0 exp
• UK Jul Service PMI 47.4 vs 52.3 prev, 49.2 exp
• BoJ likely to cut 2017/18 CPI f.cast to around 1.5% vs 1.7% - Sources
• Jpn Abe’s stimulus plan experiencing headline infl. of its own – Nikkei
• Orders drop further at Japan’s electronic parts makers – Nikkei
• Rtrs survey – Japan mfg may cut profit targets on post-Brexit JPY surge
• Rtrs survey- 63% of Jpn firms want govt to intervene in FX to tame JPY
• Discord between China’s top two leaders spills into the open – WSJ

Currency Summaries

• As usual EUR/USD is static. 1.1017-41 Europe. 1.1019-35 Asia
• Strong German PMI and better French data evident
• But overall EZ composite 52.9 from 53.1 (did beat 52.5 f/c)
• EUR barely reacted to any data implications
• EUR/USD is a wash for hedging and little more
• 1.09-1.12 range bets look good value for minimum Jul/August

• USD/JPY trades to 106.28 in European session fight back
• Long plays had continued to bail from Thurs into Asia, hitting 105.57
• Japanese importers on bid – value tom buys, Monday Gotobi
• Mkt coming to terms of no helicopter money, talk now of Y20-30tn stimulus
• EUR/JPY sees 116.45-117.26

• USD/CHF continues to pivot around the 200DMA (0.9855)
• Bigger picture range bound but with bearish risk
• Broader market in a state of flux so spot direction clouded
• Less SNB activity in the cross freeing up downside room
• USD/CHF plays a tight 0.9844-0.9865 early Friday range
• EUR/CHF similar picture but more pronounced range
• Cross supported by ever present SNB but upside limited too
• Chart:

• GBP shorts showed some doubts ahead of today's UK data
• GBP/USD rallied 1.3230-1.3292 ahead release
• GBP bears' fear prove unfounded, data far worse than expected
• Biggest monthly drop for services PMI on record
• Service & manufacturing sectors contract
• GBP/USD 1.3148 low so far, depth shorts slows reaction
• Resistance now @ 100-HMA 1.3195 and 200-HMA 1.3224

• Up as Oil suffers - falters 1 pips shy of 11 July 1.3140 peak
• Resistance reinforced by 6 June 1.3144 high. Buy stops touted 1.3145
• Trip there opens 1.3188 24 May hi since 5 Apr
• Light crude in to 44.25 today, 43.69 support - Wed's low since 10 May
• USD/CAD support Thurs 1.3023 low, Wed's 1.3014, 21DMA 1.2998

• 0.7508-0.7460 today. Talk Asian funds selling again, active since Tues’ slide
• 3 closes sub .7491 daily cloud top, good attempt to close under .7487 100DMA
• 21DMA leaning on price too @ 0.7507: Techs beginning to argue weakness
• Daily cloud twist at 0.7440 Aug 12 might see sideways bias ahead

• Based 0.6952 Thurs after dipping into daily cloud, closed above
• Resistance at Thurs pre drop high and Wed's low 7017 capped today
• 0.6975 todays low , cloud top 0.6967, rises to mid 70's next week
• Next resistance Wed's 0.7068 peak. Cloud support through 0.6912 base
• Consolidation likely, especially with AUD/NZD deep within its own cloud

Today’s events

An expiring FX option heading into the New York Cut, if close enough to the strike price, can act as a magnet for selling/buying.  If the option is large, it can generate enough trading to move the market.  

Option Expirations(Source:ThompsonReuters)

• 1 week USD/JPY vol 14.0 to 26.0 or 164 to 304 pips as captures BoJ
• 1mth slips to 15.8 vs 16.5 Thurs’. Risk reversals meet demand JPY calls
• GBP vol losses limited as GBP suffers after weak PMI. 1mth RR trades 1.0 puts
• EUR/USD 1mth vol low since April 7.85. Huge 1.0950-1.11 expiries thru next week
• AUD/USD and CAD vols meet demand by recent/2016 lows

Chart - (Source:ThompsonReuters)

USD/JPY cloud frustrates bulls
There's growing scope for USD/JPY to fall further and test 104.62 - 38.2% retrace of the 99.99 to 107.49 July rise - as substantial risk in the market remains on the downside. A daily close sub-104.62 will accelerate losses towards 103.74 - 50% of the same 99.99 to 107.49 gain. Spot recovery attempts are likely to remain capped by the falling daily Ichimoku cloud (which currently spans 106.62-107.73) into the end of the month. Only a daily close above the cloud will shift the bias back up again. Chart:

COMMENT: BoE – Measured/Calibrated August Easing Supported by Flash PMI

The UK flash PMI for July is a one-off release conducted post-Brexit referendum and between July 12 to July 21. The data came in weaker than expected with the service PMI at 47.4 (prev 52.3) and manufacturing PMI at 49.1 (prev 52.1). The market had been looking for weakness but the data is weaker than expected.
That the data will be important ahead of the BoE’s next meeting in August is a given, but the question is how much weight to put on this one post-referendum release. We think it likely that the data will support some form of stimulus given that the economy was already wakening into the June referendum.
However, there will be a desire to not be excessively negative on the release 1) there is a clear contrast between the PMIs today and the BoE’s Agents survey that showed firms favouring a “business as usual” attitude 2) the data likely reflects immediate uncertainty to which the unresolved political landscape played a role and 3) many on the BoE are likely to want to focus on the bigger medium-term picture and Brexit impact lags.
The Brexit lags and a lack of sustained financial market fallout since the referendum suggests the BoE will not go for an all in approach to easing on August 4 but a more measured/calibrated policy response. We reiterate that at this stage it might be better for the BoE to stay with more conventional tools of a rate cut along with credit easing steps (FLS extension and even corporate bond purchases).


Topics: US FX Market Open


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