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US FX Market Open – Tuesday, April 4, 2017: U.S. yields heavy and leaning on USD

Posted by Marge Maresca on Apr 4, 2017 9:54:53 AM

yeirds-1.png

Overnight Events

• EUR/USD -0.1%, USD/JPY -0.4%, EUR/JPY -0.6%, GBP/USD -0.2%
• DAX -0.1%, FTSE -0.25%, Brent +0.5%, Gold +0.4%, Copper +0.1%
• EUR/JPY hits 4 month low of 117.58 on heightened risk aversion
• UST 10-yr yield nears key 2.30 support but stages recovery to 2.33 into NY
• EZ Feb Retail sales 0.7% m/m, 1.8% y/y vs prev 0.1%/1.5% rvsd. 0.5$/1.4% f/c
• UK Mar Construction PMI slips to 52.2 vs prev 52.5. 52.4 f/c
• Britain's May must prove "no deal is better than a bad deal"-committee - Rtrs
• Bank of England says rapid credit growth could hurt UK banks - Rtrs
• S&P Global Ratings downgrades S.A credit rating to junk status for 1st time in 17 yrs
• ZAR falls 1.0% against dollar after S&P downgrade
• Macron seen beating Le Pen in second round of French election -Le Monde poll - Rtrs
• Le Pen says banks will not quit France if France quits euro - Rtrs
• Australia central bank holds rates at 1.5 pct- Rtrs
• Australia needs more housing to cool red-hot property prices - c.bank gov - Rtrs

Currency Summaries

EUR/USD
• Well contained within y/days 1.0643-81 range (1.0674-45 so far today)
• Risk averse sales of EUR/JPY – through 200DMA 117.72 pressure (117.59 low)
• Support from falling US 10yr yield – toward key 2.30 support  (2.3283 low)
• Bids expected in to the 100DMA and daily cloud top 1.0624
• No reaction to above f/c EZ retail sales, Draghi speaks 13.30GMT
• French election debate tonight – O/n vol is 9.0 – break even just 40 pips

USD/JPY
• USD/JPY has fallen from 110.93 to hit 110.34
• Risk for 110.00 break remains quite high after upside failure
• Narrowed yield spread weighs on USD/JPY
• Option market now better placed for a breach of 110 barriers
• There are said to be bids ahead of 110, while sell stops are clustered below
• Stops below 110 are likely less in size as stale USD/JPY longs have reduced
• IMM equivalent cash USD/JPY long cut in week to Mar 28

EUR/CHF
• EUR/CHF holds below SNB's prev perceived 1.0700 soft floor
• 1.0694-1.0680 range within Monday's 1.0695-1.0674
• Downside risk towards 1.0632/23 Feb/Brexit lows
• Close below 76.4%/cloud base tech levels (1.0677) required
• Heightedn risk aversion/cross sales weigh on USD/CHF
• Struggles by 1.0034 Fibo & 30-DMA. Recovery may be complete

GBP/USD
• GBP/USD elicited support just shy of 1.2417 after sterling took early Europe hit
• 1.2417 = 100DMA. Ensuing climb met headwind circa 1.2466 (Monday’s low)
• EUR/GBP threatened 0.8590 (200DMA) after GBP took early Europe hit
• 0.8550 = subsequent low. 0.8538 was Asia low. 0.8480 = pre-weekend low

USD/CAD
• USD/CAD was helped to a European am high of 1.2448 by a decline in risk appetite
• 1.2448 = 20-day high. Recent M&A news also weighing on the CAD
• ConocoPhillips last week agreed to sell oil/gas assets to Cenovus for USD 13.3bln

AUD/USD
• AUD/USD dropped to threaten mooted bids at 0.7550 during the European am
• 0.7552 = 200DMA & 76.4% of 0.7491-0.7750. Asia high was 0.7615
• Half-cent+ fall from 0.7615 influenced by a decline in risk appetite
• AUD/NZD eased to a 1wk low of 1.0825 during the European am

NZD/USD
• NZD/USD extended south from 0.7022 to threaten 0.6975 during the European am
• 0.7022 was Asia high. 0.6975 = Mar 17 low. 0.6968 was Mar 16 low
• Fonterra milk auction result in pipeline: WMP futures contracts pricing higher

Comment

USD/JPY correlation with yield spreads high
The relationship between USD/JPY and US-Japan interest rate differentials remains very close and the narrowed UST/JGB yield spread this week has coincided with weakened USD/JPY. Therefore the weight of a narrower spread across the entire curve has put 110.00 barriers back into play, a breach of which will unmask important Fibonacci levels at 109.93 and 108.83. A break of USD/JPY below 110.00 should be accompanied by a further narrowing of the US-Japan rate differentials. USD/JPY versus 1- to 30-year UST/JGB yield spreads all have log correlation readings well above +0.50, meaning the statistical relationship between the variables are significant (this has been the case since March 9). USD/JPY's relationship with the 5- and 10-year yield spreads is particularly strong, so clues on direction are best gleaned by closely tracking these.
Chart 1) http://reut.rs/2oUeoup 2) http://reut.rs/2nXn9WX

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.  

• Risk aversion brings 110 JPY barriers back in to focus – vol reaction tame
• Suggests market better prepared for break – 1mth 9.3 vs 8.9 (10.1 last week)
• EUR/JPY 1mth up 1.0 from already high levels amid French risk and 200DMA breach
• EUR/USD vols/puts propped by French risk of late. 1mth gets May FOMC now
• AUD and CAD vols up slightly from  recent/long term lows

Economic Data (GMT) - (Source:ThompsonReuters)

• 13:30  International Trade (Feb) mkt -$44.9 bn, prev -$48.5 bn
• 13:55  Redbook Same-Store Sales Index (weekly) prev +0.6% y/y
• 14:45  ISM-New York Index (Mar) prev 51.3
• 15:00  Factory Orders (Feb) mkt +1.0% m/m, prev +1.2% m/m
• 15:00  Factory Orders ex-Trans (Feb) mkt , prev +0.3% m/m

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

• 13:30  ECB Pres Draghi speaks in Frankfurt
• 16:45  FedTrade 15-year Fannie Mae/Freddie Mac securities (max $525 mn)
• 21:30  Fed Governor Tarullo to speak at Princeton University; Princeton, NJ

 

Topics: US FX Market Open

 

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