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US FX Market Open –Monday, July 4, 2016: STERLING INDEX FLAT ON THE DAY


Overnight Events

• GBP/USD 0.08%, USD/JPY 0.02%, EUR/USD -0.12%
• DXY -0.03%, DAX -0.17%, Brent 0.45%, Iron -4.05%
• EZ Jul Sentix Idx 1.7 vs 9.9 prev, 5.0 exp
• Swiss sight domestic bank deposits CHF430.337 bln vs 423.466 bln prev
• UK Jun Construction PMI 46.0 vs 51.2 prev, 50.5 exp
• EZ May Producer Prices -3.9% y/y vs -4.4% prev, -4.1% exp
• UK UKIP’s Farage saysd done his bit, he will stand down
• David Smith in Sunday Times-Carney faces a battle to head off recession
• Sunday Telegraph-Britain hit by Brexit negotiator crisis.
• Australian election cliff-hanger leaves nation in limbo, vote close
• Australian political deadlock puts AAA rating at risk – Rtrs
• US 30-year Treasury yield hits lowest since 1950s as bond rally – Rtrs
• Brexit puts London’s offshore renminbi lead under threat – IFR.
• Brexit triggers surprise emerging market asset rally – Rtrs
• BoJ Jun Tankan – Jpn firms see CPI 0.7% yr from now, previous 0.8%
• CFTC IMM CTA data - Specs cut GBP shorts, USD longs post-Brexit

Currency Summaries

• EUR/USD trades 1.1143 down to 1.1097 in opening trade in Europe
• Corp or perhaps ACB selling (intervention rebal) possibly behind early drop
• EUR/CHF trades hand in hand EUR/USD. SNB maybe spurs rebound
• Wider UST/bunds spreads could have been a trigger for initial selling
• Ebbing risk aversion weighs USTs but uncertainty will fuel dip buying
• Weaker CNY (pace accelerating) continues to underpin components of basket
• 1.1231 61.8% retrace selling on UK referendum now key

• Narrow USD/JPY range of 102.43-102.81
• EUR/JPY has seen 113.97-114.51
• US Independence Day holiday curbs interest
• USD/JPY failure above tenkan line @102.94 weighs on spot
• Japanese exporter offers remains circa 103.00 in size
• Stops likely clustered below last Wednesday's 102.17 low

• Another big rise (EUR 6bln) in Swiss sights deposits
• Similar rise was seen the prior weeks, rough EUR 14bln rise in 3 weeks
• Such large scale intervention risks distortions in wider G10 FX
• Historically SNB has rebalanced interventions, selling EUR/USD rallies
• Also favouring GBP, JPY and AUD when rebalancing a EUR focused reserve
• Liquidity today much reduced exacerbating impact of these potential flows
• EUR/CHF plays 1.0828-1.0852 and Spot 0.9730-0.9757

• GBP/USD fell to 1.3245 after way below f/c UK construction PMI at 4.30am ET
• 46.0, lowest since June 2009. 80% of survey responses received pre-June 24
• EUR/GBP tested 0.8405 (Friday’s 31mth high) in early Asian trade
• 0.8355 was European am low, before the UK construction PMI miss

• USD/CAD eased to threaten 1.2866 (Friday’s low) during the European am
• 1.2870 option expiry Monday, C$230mn strike

• AUD/USD extended north from 0.7410 to 0.7533 during the European am
• 0.7410 = early Asia low after Saturday’s inconclusive Australian election
• Result expected Tuesday. RBA expected to keep cash rate at 1.75% at 0.30am ET
• Offers tipped around 0.7550, option-related interest mooted

• NZD/USD scaled a 10-day peak of 0.7204 during the European am
• 0.7150 was early Asia low after inconclusive Australian election

Option Expirations(Source:ThompsonReuters)

• EUR/USD: 1.1200 (447M)
• AUD/USD: 0.7400 (246M)
• USD/CAD: 1.2870 (230M)


GBP-UK gilt curve to flatten further on BoE outlook.

Concerns over Brexit since June 24 have fuelled the rally in global bonds, with benchmark yields on major bond markets hitting historic lows and flattening yield curves. For UK gilts, the major factor for the shift lower in the yield curve has been the increasing prospect of action from the BoE. Overall the 2s/30s gilt curve since June 23 close is flatter by some 15.5bps with 15bps of this due to a flattening of 2s/5s. This has come on the back not only of market expectations that the BoE will be cutting rates, but the idea that official interest rates will remain lower for even longer than initially thought. A flattening of the 1-year forward OIS curve supports this assessment with the spread between 1y1y GBP, 2y1y GBP and 3y1y GBP having narrowed sharply and all converging toward zero http://tmsnrt.rs/290ODle. The gilt market has also yet to factor in the impact of potential credit/quantitative easing.

EUR/GBP manages weekly close above fibo

EUR/GBP found decent support at 0.7566 in May and subsequently broke well above 0.8097 - 61.8% retrace of the 0.8815-0.6935 (2013-2015) fall. Cross has now managed a weekly close above 0.8371 - 76.4% retrace of the same 0.8815-0.6935 drop. Ultimate potential is for substantial gains all the way up to test the 0.8815 2013 peak. Fourteen-month momentum remains positive, highlighting the underlying bullish bias.  Massive day swing from 0.7600 to 0.8315 is another now bullish sign, though watch out for continued bouts of volatility. Chart: http://tmsnrt.rs/29dL1fQ

Looking Ahead - Economic Data (GMT)
• 13:30 CA RBC Mfg PMI 52.1 previous

Looking Ahead - Events, Other Releases (GMT)
• U.S. Holiday Independence Day


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