Forex Insider Daily Update 19 May 2017

Major Bank Daily Position 

USD/JPY - Morgan Stanley - LONG Position - From 113.00 - Closed at market at 111.51 (L/T) -149 pips

GBP/CHF - Morgan Stanley - LONG Position - Opened - Entry: 1.2682, Target: 1.3400, Stop: 1.2500 (M/T)

EUR/USD - Morgan Stanley - LONG Limit Order - Placed - Entry: 1.1030, Target: 1.1800, Stop: 1.0800 (M/T)

Major Bank Daily Analysis & Insights

Credit Agricole

Credit Agricole CIB FX Strategy Research notes that rising uncertainity about the Trump Administration is triggering risk-off moves in the markets.

In that regard, CACIB expects that over the coming days price action likely to remain driven by political headlines especially in the absence of significant economic data.

"Thus while a further decline in USD/JPY towards the April lows remains possible further significant weakness would require the US rates curve to completely price out FED tightening or even move to a possibility of policy easing,"CACIB argues.

In relation to that, CACIB suspects that equity markets will also drive USD/JPY price action over the coming days.

"The current correction is still modest relative to the rally in since the elections and it would probably take a further 5%-10% fall in equities to trigger a significant tightening in the financial conditions derailing risk sentiment and the FED"CACIB adds.

JP Morgan

JP Morgan FX technical Strategy Researches notes that EUR/GBP medium term charts still suggest a high likelihood that a sustainable high has been marked at 0.9403 in October and that a much broader down-consolidation has been launched.

Such a medium-term pattern, according to JJPM, has a minimum price target of 0.8168 (50% of the 2015-2016 rally).

However, in the short term JPM now looking for the breakout above 0.8552 (daily trend) to signal a broader recovery to 0.8678, and towards 0.8854/62 thereafter.

BofAML

Bank of Americal Merill Lynch FX Strategy Research has been arguing in many recent reports that diverging monetary policies will be positive for EUR and USD against JPY. BofAML has reiterated this view in a note today with an update on its related FX trading strategy.

“We have argued that the Fed will be hiking faster than markets expect, particulary in 2018. We also expect the ECB to announce QE tapering this fall, as they are not willing to increase the issue limit or relax the capital key we see depo rate hikes after QE ends next year. As the BOJ remains commited to yield targeting, we would expect JPY to weaken against both USD and EUR,” BofAML argues.

What’s the trade: Buy dips in EUR/JPY tactically for 129.

“We see more upside for EURJPY in the months ahead, but we would trade it tactically given how much is has already moved. Our equilibrium EURJPY estimate is 129, but spot can move above this level during the business cycle when monetary policies diverge. The next EURJPY move could be slower and choppier, but we would be buying any dips while in a risk-on market,” BofAML recommends.

What’s the trade? Buy dips in USD/JPY strategically for 120 and sell rallies above that level.

“We also see more upside for USD/JPY, but it would take a little longer… We would be more concerned about US rhetoric about currency manipulation if the USD/JPY rallies decisively beyond 120, but we are not there yet. We would buy dips on the USD/JPY into 120 and sell the strength above the level,”BofAML adds.

TD

TD Research discusses the impact of the recent spike in the VIX on JPY and EUR.

To explore that, TD shows how EUR and JPY react on a rolling 12m betas of the VIX.

TD makes the following 2 observations:

1. JPY is a consistent safe haven in G10FX. The beta remains positive throughout the sample, indicating that when vol rises so does the JPY.
2. The EUR shares a mix of a high beta and a safe haven and as such EUR will rally on US-inspired vol.

UOB

EUR/USD: Bullish: Strong rally has scope to extend to 1.12

While the “bearish outside day” registered yesterday does not bode well for our current bullish view, the price action is deemed as part of a short term consolidation phase and not the start of a reversal. That said, upward momentum has clearly been dented and it may take a few days before we see the next push higher to 1.12. On the downside, an unexpected break below the stop loss at 1.1045 would indicate the start of a deeper pull back likely to below 1.1. In the meanwhile, those who are long may likely to consider reducing their position on any move to 1.117.

GBP/USD: Neutral: In a 1.285/1.305 range

We indicated yesterday that the “immediate pressure is on the upside even though 1.303 is expected to offer solid resistance”. GBP hit a high of 1.3048 before staging a “flash crash” to a low of 1.2888. The subsequent swing higher has resulted in a mixed outlook and we prefer to continue to hold a neutral stance and expect this pair to trade choppily in the coming days, likely within a broad 1.285/1.305 range.

AUD/USD: Neutral: Rebound has room to extend to 0.748/85

We have held the same view since Tuesday (16May) wherein we believe the recovery from the 0.7329 low seen earlier last week has room extend higher to 0.748/85. AUD touched a high of 0.7468 yesterday before easing off quickly. As long as the key support at 0.737 continues to hold, the prospect for another attempt towards 0.748/85 still appears to be quite good. A clear break above this level would indicate that AUD has moves into a bullish phase.

NZD/USD: Neutral: Back in a 0.685/0.695 range

The recent buildup in upwards momentum has fizzled out with the sharp and swift drop from a high of 0.6952 yesterday. The key 0.697 resistance was unthreatened and from here, it seems likely that NZD has moves back into a 0.685/0.695 consolidation range.

USD/JPY: Bearish: Decline oversold but room for extension to 110.1

We just turned bearish USD yesterday and held the view that the oversold decline has room to extend lower to 110.1. USD touched a low of 110.21 before staging a strong rebound. As indicated, the reward to risk ratio is not attractive but further USD losses is not rules out until 111.9 is taken out. That said, the low 110.21 is acting as a solid support now and those who are short should consider booking some profit ahead of this level.

Citi

CitiFX technical Strategy Research remains bullish on WTI Oil noticing that short term indicators suggest that the low may be in.

In particular, Citi argues that the last week’s decisive close back above the March lows($47.01-$47.09) has further added to the technical bullish case.

“While it does not meet the requirements for a proper 55-200 week moving average set up, it does still look like an overall bullish setup with added conviction on a weekly close back above the 55 week moving average,” Citi argues.

In line with this view, Citi targets a re-test of the years high around $54.94-$55.24, and remains of the view that new trend highs are likely in WTI later this year towards converging levels around $61.82-$65.24.

Goldman Sachs

Goldman Sachs FX Strategy Research is not quite ready to call the bullish dollar trend over noticing that the 3 bullish factors supporting appreciation over the last 3 years remain in place, including:

1. A US economy at full employment
2. Expected US fiscal stimulus
3. Conservative market pricing for the FED.

However, GS notes 3 other bearish factors that are working against the USD this year:

1. The dollar is now moderately overvalued according to standard metrics
2. Growth outside the US is picking up
3. The scope for monetary policy divergence beyond this year is much smaller than in the past.

All in, GS holds a selective bullish USD view in the medium term and expects the USD to outperform GBP, JPY, EUR, CHF and SEK but underperform NZD, CAD, NOK and AUD.