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US FX Market Open – Monday June 12, 2017: GBP gives way to uncertainty

Posted by Marge Maresca on Jun 12, 2017 7:23:06 AM

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Overnight Events

• EUR/USD +0.24%, USD/JPY -0.39%, GBP/USD -0.28%, EUR/GBP +0.56%
• DXY -0.15%, DAX -1.01%, FTSE -0.29%, Brent +0.42%, Gold +0.31%
• Britain's May brings back foe, aiming to unite party before Brexit
• Macron's likely landslide lifts markets, low turnout clouds celebration
• UK business confidence slumps after election - IoD survey
• Cutting sales tax would have little impact on German surplus-ministry
• Qatar can defend economy and currency, finance minister tells CNBC
• Bank of France maintains French Q2 GDP growth forecast at 0.5 pct
• Burst in investor confidence in oil pushes up prices
• JP Apr core machinery orders -3.1% m/m, +2.7% y/y, -1.3% and +6.3% exp
• JP May domestic corp goods prices unch m/m, +2.1% y/y, +0.1%, +2.2% exp

Currency Summaries

EUR/USD
• EUR/USD steady above 1.1200 in the run-up to this week's FOMC
• Bullish techs lead to more EUR longs: http://reut.rs/2sSX63O
• Close under 21-DMA now 1.1193 needed to damage the bullish view
• Interest rates move further against a bullish EUR/USD view
• Significant widening UST/Bunds spreads ignored: http://reut.rs/2sSIamj
• Given rates & EUR longs 1.1300 break unlikely amounts to much

USD/JPY
• USD/JPY fell sharply to trade back through 110.00
• Range has been 109.88-110.44
• Scope for near-term losses down to 109.76 pivot
• Decent supply above, said to be offers circa 110.50
• Cloud twist on Tues could see further near-term gains
• 3.2bn 110 strike expiring Fri, biggest all week, has caught mkt's attention

EUR/CHF
• Falling 21-day MA weighs on USD/CHF and the next move looks to be lower
• Tentative Doji fm Friday candles. Lower high today at 0.9693. Avg at 0.9731
• Spot offered in Europe. Plays 0.9689-0.9671
• EUR/CHF tight ranges since Jun 6 1.0838 low. 1.0849-65 today
• 200-HMA has been capping attempts to rise http://reut.rs/2rRbriK
• Swiss domestic sight deposits fall to 476.194bln w/e Jun 9 vs 480.329
• Only slight rise in total depos
• Reinforces theory that SNB activity to tame CHF has likely eased

GBP/USD
• Cable traded as high as 1.2769 early Europe before David Davis spoke
• Davis said Brits had demanded to take control of UK's borders via Brexit vote
• Brexit minister says this means UK leaving EU single market
• Cable extended south to 1.2694 late in the European am. 1.2702 = Asia low
• EUR/GBP traded as low as 0.8782 early Europe, before Davis spoke to ITV
• 0.8836 = late European am high. 0.8860 was 7mth high Friday

USD/CAD
• USD/CAD traded 24 pip range during European am, 1.3438-1.3462
• 1.3472 was pre-weekend high after 1.3424 low on strong Canada jobs data
• IMM CAD shorts were only modestly reduced in week to June 6
• CAD shorts 120,993 vs 26,492 longs
• BoC's Wilkins slated to speak in Winnipeg at 1720GMT

AUD/USD
• AUD/USD enlarged intra-day range to 24 pips during European am
• 0.7546 = European am high. 0.7522-0.7536 = Asia range (Sydney holiday)
• Monday range-to-date approximates to Friday's range
• Australian jobs data due this week (Thursday), employment f/c +10k

NZD/USD
• NZD/USD threatened 0.7169 as kiwi took early Europe hit
• 0.7169 = June 7 low. AUD/NZD up to threaten 1.05 early Europe
• 0.7213 was NZD/USD high in Asia. 1.0442 = AUD/NZD low in Asia
• NZ Q1 C/A & GDP data due this week. RBNZ seen on hold next week

Comment

UK political uncertainty doesn't bode well for pound
UK political uncertainty has increased markedly after last week's hung parliament election result and will continue to weigh on the pound in coming weeks. Cable risks falling to 1.2515 (April 18 low) with a clean break below 1.2500 paving the way to 1.1983 (January 2017 low). The election result raises questions about how long the Tory government will last, how much of its agenda it can get through parliament and what its approach to Brexit will be especially as it has to rely on votes from NI's DUP. The DUP doesn't want a hard border with the Republic of Ireland, which could complicate the UK's threat to walk away from Brexit negotiations with no deal. All of this uncertainty means recovery moves in GBP/USD will likely be capped by 1.2850/1.2901 - 50%/61.8% retrace of the 1.2983 to 1.2636 fall - as the underlying trajectory is down. Chart 1) http://reut.rs/2sTinKI 2) http://reut.rs/2rRnPPX

Chart - (Source:ThompsonReuters)

EUR/GBP bulls eye 0.90+ potential
The focus has returned to the upside on EUR/GBP charts and a rise above 0.90 could be on the cards. Last Friday's rally to 0.8860 negated bullish signals from earlier in the week. The move higher broke 0.8854 which was the 50% Fibo retracement of the July-September 2016 0.9403 to 0.8305 fall. Longer-term EUR/GBP bulls are hopeful of a close above that Fibo. Any such close would bring the 61.8% Fibo of that move at 0.8484 into play where a break then risks a full retracement to the 0.9403 July 2016 peak. The fact that last week's pullback held above the top of the weekly cloud was another encouraging sign for the bulls. This week the cloud stands at 0.8726 and any pullbacks need to hold above there to keep the bullish bias intact. Chart http://reut.rs/2rRooJh

Today’s events

Option Expirations (Source:ThompsonReuters)

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.  

• EUR/USD vols new 2.5 year lows in the front end of the curve
• Riskies small EUR calls bias. EUR 30bln 1.11-1.13 expiries this week
• USD/JPY around 110.00 - 3.2bln expiry here Friday. Vols low
• GBP risk premiums pared, short dated vols sold. Back end vols/puts firm
• AUD/USD, NZD and USD/CAD vols all in at 2.5 year lows

Events, Other Releases (GMT) - (Source:ThompsonReuters)

• 15:45 FedTrade operation 30-year Fannie Mae / Freddie Mac (max $1.625 bn)

Economic Data (GMT) - (Source:ThompsonReuters)

• 18:00 Treasury Budget (May) (CBO -$87 bn deficit, prev May -$52.5 bn)

 

Topics: US FX Market Open

 

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