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US FX Market Open – Wednesday, April 19, 2017: Sterling holds close to 6-month high

Posted by Marge Maresca on Apr 19, 2017 7:30:23 AM



Overnight Events

• EUR/USD -0.05%, USD/JPY +0.4%, GBP/USD -0.05%, AUD/USD -0.5%
• DXY +0.1%, DAX +0.3%, FTSE flat, Copper +1.3%, Gold -0.6%
• EUR/USD hits three-week high at 107.37
• Sterling holds close to 6-mth high on prospect of snap British election
• Aussie lower on falling iron ore prices. AUD/USD hits 0.7505 low
• UK's May says early election averts clash with end of Brexit talks - Rtrs
• EZ Mar Inflation 1.5% y/y vs 1.5% f/c
• Euro zone Feb unadjusted trade surplus 17.8 bln euros vs prev -0.6bln. 16.2bln f/c
• ECB Hansson: Need more incoming data before considering concrete policy action -  Rtrs
• Germany defends surplus, urges ECB to tighten policy - Rtrs
• South Africa's finance minister Gigaba rules out nationalisation of mines, banks - Rtrs
• Macron, Le Pen cling on to first round lead in French election race - Le    Monde/Cevipof poll

Currency Summaries

• EUR/USD 1.0709-37 in Asia extending NA's high by one pip
• Spec buyers have been encouraged by softer US yields
• Net spec position is flat and beginning to edge towards net longs
• Corp and other real money sellers are likely to emerge
• 21-DMA 1.0694 & 200-HMA are pivots for fresh bullish positions
• Macro supply reported near 1.0750. Mar 29 low 1.0740/Mar 30 high 1.0772

• USD/JPY better bid in Europe from 108.57 to 108.97
• Potential to close back above 200-DMA @ 108.87
• USD/JPY resilient yesterday in face of stock market declines
• Today FTSE flat (GBP+ weighs), FTSE 250+1%, DAX/E-mini +0.3%
• GBP/JPY buying at forefront of JPY selling today
• Pair meets heavy selling ahead daily Ichi cloud:

• EUR/CHF remains offered ahead of 1.07. 1.0698 peak then off again to 1.0677
• SNB continue to intervene to weaken CHF but FR election event risk weighs
• Downside remains in focus. 1.0660 last wk's low, by 1.0658 lower 30-day Bolli
• USD/CHF working its way back toward the 200-day MA at 0.9950
• Spot broke below parity Tuesday, almost matches Tues 0.9955 low today
• 0.9982-0.9956 in Europe after brief recovery in Asia

• GBP/USD elicited support pre-1.2800 during the European am
• Cable spiked to 1.2908 after breaking 1.28 at 1.42pm ET Tuesday
• 1.2908 = 6mth high. 1.2860 = Asia high. 1.2853 = European am high
• EUR/GBP traded a quarter-penny range during the European am
• 0.8349-0.8374 (high before low). 0.8512 was Tuesday’s high
• Drop from 0.8512 fuelled by potential for big UK Tory election win

• USD/CAD extended north to a 13-day high of 1.3436 during European am
• Offers expected circa 1.3450 (1.3451/55 = Apr 4/6 highs)
• 1.3400 (Tuesday’s high) is now a support level. 1.3376 was Asia low

• AUD/USD extended south to a 1wk low of 0.7505 during the European am
• 0.7562 = Asia high, with fund selling flagged as factor in subsequent fall

• NZD/USD extended south to threaten 0.7000 during the European am
• 0.7053 = Asia high. NZ Q1 inflation data due 5.45pm ET, +0.8% qq f/c

Brexit – Now a glide path, not a cliff edge
The countdown to the June 8 election begins but what are the Brexit implications of PM May’s Conservative Party extending its current 17 seat majority in the House of Commons? It is likely that such a majority will provide PM May with the mandate and flexibility that prioritises controlling immigration and not being under the jurisdiction of the ECJ while at the same time aiming for a longer transitional period.
The snap election will allow Brexit negotiations to be less influenced by an election that would have been held in 2020 with 2022 now the next focus after June 8. Tail risks on both sides are reduced such that calls for another referendum or soft Brexit will quieten as will those aiming for a hard Brexit. The lower risks related to the latter means less chance of a cliff edge and explains the rally on GBP which has broken through resistance at 1.2780/00 against the USD.
While PM May will gain a lot of flexibility in negotiations it is unlikely to change the stance of the EU. But what it will do is to allow the UK and EU to enact the divorce over a 4-year period as opposed to 2-years even if the negotiations have to be completed over 2-years. Brexit is now more about a glide path as opposed to a cliff edge.
We are likely to see further short positon unwinds on GBP/USD now that the 1.2780/00 region has given way. While this will weigh on the FTSE100, a recovery on GBP should help support gilts as BoE will be comforted that the impact of GBP to inflation will not persist.

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.  
• GBP/USD vols higher since snap UK election announced Tues
• Topside covering. 2mth gets 8 Jun date, up 0.75 since y/day
• Vols elsewhere ease – USD/JPY stagnation – 1mth off 1.3 this week
• French risk premiums peak – setback in EUR/JPY and EUR vols/puts
• AUD tied to ranges – saps long vol inspiration, CAD too  

Economic Data (GMT) - (Source:ThompsonReuters)

• 12:00  MBA Weekly Mortgage Application Indices
• 15:30  EIA Weekly Petroleum Status Report

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

• 14:45  FedTrade operation 30-year Fannie Mae/Freddie Mac (max $1.450 bn)
• 14:45  FedTrade operation 30-year Ginnie Mae (max $1.200 bn)
• 17:30  FRB Boston's Rosengren addresses Hyman Minsky conference; N.Y
• 19:00  Beige Book


Topics: US FX Market Open


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