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Market Recap
● European shares declined after surveys showed
price cutting failed to save euro zone from slowing
factory growth and the data showed that Chinese
manufacturing slowed last month at its fastest
pace in more than three years.
● Europe's FTSEurofirst 300 was down 0.1 pct, Euro
Stoxx 50 fell 0.5 pct, Germany's DAX dropped 0.4
pct and France's CAC inched 0.4 percent lower.
● MSCI's broadest index of Asia-Pacific shares out-
side Japan edged up a modest 0.1pct, after losing 8
percent in January. Australian and Japan stocks
posted gains of 0.8 and 2pct, respectively. Chinese
stocks slipped 1.5 to 1.7pct after the weak factory
data.
● Oil declined 2pct as weak economic data from
China depressed prices and an OPEC source played
down talk of an emergency meeting to stop the de-
cline. Brent April crude futures were down 1.8 per-
cent, or 64 cents, at $35.35 a barrel at 0905 GMT.
U.S. West Texas Intermediate was down 2 percent,
or 68 cents, at $32.94 a barrel.
● Spot gold rose up 0.3pct at $1,120.66 an ounce by
0641 GMT. U.S. gold for April delivery rose 0.4pct
to $1,121.10 an ounce.
Treasuries
● US 10-year Treasury yield last stood at 1.9831, up
0.01 pct.
● UK Gilts are around 6 ticks lower on the January
Markit/CIPS Manufacturing PMI data at 120.07.
The data was forecast to continue its declining run
in the face of slowing global growth with a reading
of 51.7 (prev 52.1). The actual reading was a bit of
surprise of 52.9 as output from heavy industry un-
derpinned.
● JGB prices were sharply higher. But JGBs in the 7-
yr and longer zone lost some of their earlier gains,
as the BoJ did not offer to buy super-long. JGBs
yields on the current 2-yr JGBs are down 7.5bp at -
0.155%, after moving between -0.085% and -0.16%,
while the 5s are down 3bp at -0.10%, vs -0.07%
earlier. The 10s are down 3.5bp at 0.06%, vs 0.05%
earlier, JGB futures are up 0.17 at 150.59, after
hitting a fresh record high of 150.78 earlier.
● German 5-year bond yields reached record lows of
-0.318pct as markets expected major central banks
to be stuck in a race to the bottom on interest
rates for the foreseeable future. 2-year yields fell
as low as -0.486 percent, within a whisker of their
record low. 10-year Bund yields fell to 0.236 per-
cent. While 10-year Portuguese yields were 2 ba-
sis points lower at 2.67 percent. Greece yields
were little changed at 9.80 percent.
● Australian bond yields dropped with the 10-year
reaching a 3-month low of 2.6 percent. Reflecting
the lower yields, bond futures rose with the 10-
year contract putting on 2.5 ticks to 97.390. The 3-
year bond contract gained 1 tick to 98.140. New
Zealand government bond yields were 1.5 basis
points lower at the short end and 4bps lower at the
long end.
Market Briefs
● EUR/USD bid in Europe. 1.0843 to 1.0867.
● USD/JPY off Friday's 121.70 peak. Plays 121.00 to
121.49.
● GBP/USD knee-jerk 1.5322 high after higher-than-
exp mfg PMI then lower.
● Brent marginally negative on the day but a reluc-
tant faller.
● Saudi Arabia ready to manage oil market but all
must cooperate - Al Hayat press.
● ECB Nowotny hopes for more rational approach by
markets in March.
● Nowotny: China’s economic struggles are of par-
ticular concern to Europe.
● ECB's Coeure suggests EU Commission treasury
for euro zone.
● EZ Jan Markit Mfg final PMI 52.3 vs previous 52.3.
52.3 expected.
● UK Jan Markit/CIPS Manufacturing PMI 52.9 vs
previous 52.1 revised. 51.7 expected.
● UK Dec BOE Consumer Credit 1.169bln vs previ-
ous 1.479bln revised. 1.300bln expected.
● UK Dec Mortgage Lending 3.204bln vs previous
3.755bln. 3.700bln expected.
● UK Dec Mortgage Approvals 70.837k vs previous
70.424k revised. 69.600k expected.
● Swiss Jan Manufacturing PMI 50.0 vs previous
50.4 revised. 50.9 expected.
● SNB domestic deposits rise to CHF 407.335 bln
from previous 403.135 w/e Jan 29.
Institutional Positions
● Morgan Stanley: Amid downward revisions to growth and
limited trade rebalancing, ZAR looks more bearish.
● Morgan Stanley: Long USD/TRY, USD/MYR, JPY/KRW,
JPY/TWD, USD/BRL AND USD/PEN.
● Morgan Stanley: We like trading short GBP/JPY and use
rebounds to sell GBP/USD.
● Long AUD/NZD, expecting it to reach 1.10 by year-end,
long AUD/KRW, targeting 920- BoFA Merrill Lynch.
● We are short EUR/JPY, expecting it to weaken to 114
from currently 128 by the end of the year- BoFA Merrill
Lynch.
3. Economic Data Preview
● (0830 ET/1330 GMT) The U.S. Commerce Depart-
ment is expected to report that consumer spending
rose 0.1pct in December and income increased 0.2
percent.
● (0930 ET/1430 GMT) The RBC Canadian Manufac-
turing PMI for January, a measure of manufacturing
business conditions, is scheduled for release. The
index fell to its lowest level, a seasonally adjusted
47.5, in December.
● (1000 ET/1500 GMT) The Institute for Supply
Management (ISM) is expected to report that the
national manufacturing index fell to 48 in January
from 48.2 in December.
● (1000 ET/1500 GMT) U.S. construction spending
is expected to have rebounded by 0.6pct in Decem-
ber after falling 0.4 percent in November.
Key Events
● (1145 ET/1645 GMT) FedTrade Operation 30-Year
Ginnie Mae (max $1.000 bn).
● (1300 ET/1800 G MT) Fed Vice Chair Fischer on
"Recent Monetary Policy" at CFR luncheon; NY.
● (1100 ET/1600 GMT) European Central Bank’s
President's Draghi Speech.
Top News
● Factory growth across the euro zone slowed at
the start of 2016 as incoming orders failed to reg-
ister any meaningful increase, even though compa-
nies lowered prices at the deepest rate for a year, a
survey showed. Markit's PMI will be disappointing
reading for the European Central Bank, which left
policy unchanged in January but hinted more eas-
ing could be coming within months. The manufac-
turing PMI for the euro zone dropped to 52.3 from
December's 53.2.
● January updates on Asia's mammoth factory sector
released on Monday showed the new year began
much as the old one ended - with too much capac-
ity chasing too little demand. China was again the
epicenter of disappointment as its official measure
of manufacturing fell to the lowest since mid-2012,
but the weakness also encompassed such bellweth-
ers of high-tech trade as South Korea and Taiwan.
● British factories enjoyed a brighter start to the
year than expected, helped by surging output at
large manufacturers, but companies cut staff at the
fastest rate in three years and export orders fell, a
survey showed on Monday. The Markit/CIPS manu-
facturing purchasing managers' index rose to a
three-month high of 52.9 in January from 52.1 in
December, surpassing all forecasts in a Reuters poll
of economists, who expected a reading of 51.8.
● Growth in German manufacturing eased to a three
-month low in Jan as weaker demand from abroad
weighed on new orders, a survey showed, suggest-
ing Europe's largest economy got off to a sluggish
start to the new year. Markit's purchasing manag-
ers' index for manufacturing, which accounts for
about a fifth of the economy, fell to 52.3 in January
from 53.2 the previous month.
● French manufacturing teetered between growth
and contraction in Jan and export orders shrank,
according to a monthly survey of company purchas-
ing managers. Confirming preliminary data, the fi-
nal Purchasing Managers Index fell from 51.4 in
December to 50.0 in January.
● ECB policymaker Ewald Nowotny on Monday said
he hoped markets would not overly anticipate ECB
actions in March after showing excessive expecta-
tions for policy action in December. "We have seen
in December a situation where market expectations
became much too extensive, so I hope that there is
a more rational approach this time," he told report-
ers on the sidelines of a central banking conference.
"In December, they (markets) clearly expected too
much and I think that should give them a certain
lesson," Nowotny said.
● China's central bank injected 1.53 trillion yuan
($232.59bn) in liquidity ahead of the Lunar New
Year festivities to avoid a cash crunch in the lead
up to the holiday season. China's central bank lent
862.5 billion yuan to financial institutions in Janu-
ary via its medium-term lending facility (MLF), it
said in a statement on Monday.
● For 16 years, Malaysia's internationally-lauded
central bank governor strengthened the economic
credibility of a country otherwise facing a slew of
emerging market challenges, ranging from currency
crises to a commodities markets crash.
● Indonesia's annual inflation rate rose in January
but at a slightly slower pace than expected, and
remained within the BI’s target range. Consumer
prices rose 4.14pct in January from a year earlier,
largely due to higher food prices, the statistics bu-
reau said on Monday.
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FundamentalAnalysis
Safe-haven bond yields to gradually rise as Fed aims to ease
bubbles in the sovereign bond market
The Fed is likely to tighten monetary policy only by as much
as markets allow without major turmoil. The Fed will try to
avoid any further asset price inflation and ease any bubbles
that have already emerged, such as in the sovereign bond
market. During the 2004-07 period, when the Fed continu-
ously tightened monetary policy, bond yields did not react and
the housing bubble continued to expand.
With the U.S. expansion in its seventh year, the lack of price
pressures is starting to raise deeper questions about whether
the economy will produce the kind of demand that can get
inflation to Fed's 2 percent goal. Based on the difference in
yields between TIPS and nominal Treasuries, the 30-year in-
flation outlook fell to an annual rate of 1.49pct last month --
the lowest since early 2009.
Various FOMC members have said that the Fed needs to
avoid a repetition of the 2004-07 period. The Fed is likely of
the opinion that the US consumer no longer needs a positive
wealth effect to sustain consumption growth, given almost
full employment, the likelihood of upcoming wage growth and
the relief from the lower oil price. The Fed's bond purchases
have effectively transferred some of the asset price apprecia-
tion related to the economic cycle towards an earlier stage of
the cycle, helping the consumer to digest the debt/housing
market overhang from the financial crisis.
"Against this backdrop the Fed should succeed in gradually letting
the air out of the bond bubble, and safe-haven bond yields are
set to gradually increase. The rising relative attractiveness of sov-
ereign bonds and the unwinding of the 'hunt-for-yield' should
weigh on the returns of other asset classes resulting in years of
asset price disinflation at the global level," said Commerzbank in
a research note.
Besides rate hikes, the Fed has many tools to steer the proc-
ess. Their bond holdings can be used to manage US Treasury
yields. The policy spectrum ranges from the current reinvest-
ment of any proceeds from their bond holdings, with the op-
tion of only partly reinvesting maturing debt or not at all, to
outright bond sales. Data shows the amount of maturing US
Treasury bonds in the Fed’s System Open Market Account
averages roughly USD22bn per month between 2016 and
2021.
U.S. Treasury yields fell to four-month lows on Friday after
BoJ surprised investors by introducing negative interest rates
in a further effort to stimulate the country's flagging economy.
U.S. 10-Year Treasuries yield stood at 1.915 percent on the
day, while 2-year yield dropped to a 3-month low of 0.766
percent on Friday before bouncing to 0.779 percent.
5. 5 www.econotimes.com
Economy Watch
● S.Africa's cbank statement: Headline CPI seen at 7.8 pct in Q1 2016 vs 5.9 pct forecast in November.
● S.Africa's cbank statement: GDP growth seen at 1.6 pct in 2017 vs 2.1 pct in November.
● S.Africa's cbank statement: Headline CPI seen at 7.3 pct in Q2 2016 vs 5.8 pvs, 6.7 pct in Q3 vs 5.8 pvs and seen at 6.2 pct
in Q4
● S.Korea sees "big difference" in 2016 export prospects from views seen last year – official.
● S.Korea finance minister says may raise budget spending allocation for Q1 to boost economy.
● Colombia central bank says 2015 GDP likely grew at 3 pct.
● Chile government says fiscal deficit 2.2 pct of estimated GDP in 2015.
● Czech finance ministry keeps 2016 GDP forecast at 2.7 pct, raises 2017 to 2.6 pct (pvs 2.4 pct).
● Czech finance ministry cuts 2015 fiscal deficit estimate to 1.1 pct/GDP (pvs 1.2 pct/gdp).
● Czech finance ministry end-2015 public sector debt estimate 41.0 pct/GDP (pvs 40.9 pct/gdp).
● Czech finance ministry cuts average 2016 inflation forecast to 0.5 pct (pvs 1.1 pct), 2017 avg cpi to 1.6 pct (pvs 1.9 pct).
● Polish households' CPI expectations for year-ahead at 0.2 pct y/y in Jan vs. 0.2 pct in Dec - central bank.
● India's 2014/15 GDP growth revised to 7.2 pct y/y from 7.3 pct earlier – govt.
Policy Watch
● Reuters Survey-Polish central bank seen keeping rates stable at 1.50 pct until hike in Q3 2017.
● Reuters Survey -Polish central bank seen holding benchmark rate unchanged at 1.50 pct on Feb. 3.
● Reuters Survey –All 21 economists expect Thai c.bank to hold benchmark rate at 1.50 pct on Weds.
● Reuters Survey -15 out of 15 analysts surveyed expect Mexico's central bank to hold interest rate at 3.25 pct on Feb 4.
● Reuters Survey –Median forecast of analysts surveyed is for a 25 basis point hike in second quarter.
● Reuters Survey -9 of 14 economists see key rate at 1.50 pct by end-2016; 4 predict 1.75 pct; one sees 1.00 pct.
● Philippine c.bank governor says there is no real urgency to change policy stance.
● Fed's Williams: Can have a little more monetary accommodation this year than had thought in December.
● Williams: BOJ decision to go to negative rates does not fundamentally change U.S. outlook.
● Williams says if economy slows more than expected, first tool would be to slow rate hikes.
● Fed's Kaplan does not predict number of rate hikes, says Fed not locked in to 3 or 4 this year –interview.
Trade Views
● The prospect of looser monetary policy abroad will likely increase near-term pressures for the SEK as the Riksbank be-
comes increasingly pressured toward further easing at its February meeting- Barclays.
●The expected dovish bias of RBA is an additional downside risk for AUD- Barclays.
● Price action in AUD and NZD is likely to be driven mainly by global risk sentiment and commodity prices- Barclays.
● Asian currencies could firm further if global equity markets and oil prices extend their relief rallies- Barclays.
● Barclays: USD/MXN is overvalued between 20% and 25%, but would not fade any weakness at this point, particularly be-
cause of the high-beta nature of the cross.
● Barclays: Only extremely bad growth data and/or a sudden appreciation of the MXN would motivate it to remain on hold
for longer.
● Barclays: Continued ZAR strength could be contained toward the end of the week.
● Japanese yen net longs rise to highest since mid-February 2012.
● Speculators further reduce U.S. dollar bets; net longs hit lowest in 3 months - CFTC, Reuters.
7. 7 www.econotimes.com
Currency Derivatives
Certain yields from EUR/USD short strangle as tepid IVs crawling down in snail’s pace and range bound trend
IVs and delta risk reversal: As you can observe from the nutshell showing IVs, the implied volatility is likely to reduce from 1W
- 1M contracts and would likely to perceive the lower side for next 2-3 months (below 10%).
The delta risk reversal indicates hedging interest seen in EURUSD upside risks and accordingly volumes in overpriced calls
have been piling up and it would likely remain the same for next 1-3 months or so. You can also observe the convergence
between historic and implied vols as well as the risk reversals curve moving in sync with spot FX curve.
Rationale: Since the range bounded market is evidenced so far from last couple of weeks and the continuation is suggested by
technicals, shift in risk reversal from negative to positive numbers and lower implied volatility at 8.65% in next 1 month to
substantiate this reasoning, thus we recommend capitalizing on this advantage through below option trading strategy.
As the risk appetite varies from different investors to different traders, we've customized our formulation of strategies for
such varied circumstances.
Currency Option Strategy for Speculation: Short strangle
Short 2% OTM call and short one more -1.5% OTM put of the same maturity for net credit. The OTM strikes should be se-
lected so as to meet out the above specified bands on both the sides. We've chosen the strikes so as to match the above
mentioned risk reversal adjustments with spot FX movements.
This strategy stems in limited returns with unlimited risk when the speculators in FX market ponders that the EURUSD would
experience little volatility in the near term.
Expect maximum returns from this strategy when the exchange price of EURUSD on expiration date is trading between the
strike prices of the options sold. At this price, both options expire worthless and the options trader gets to keep the entire
initial credit taken as profit.
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Technical Analysis
NZD/CAD breaks below ichimoku cloud, decline till 0.9000/0.8800 is possible
Major Support -0.9050 (Ichimoku Cloud)
Major resistance – 0.9150 (55 day EMA)
● NZD/CAD has broken major support 0.9050 and declined till 0.9037. It is currently trading around 0.9070.
● Short term trend is still weak as long as resistance 0.9150 holds. Any break above 0.9150 will take the pair to next level
0.9205/0.9236.
● On the downside major support is around 0.9035 and break below targets 0.9000/0.8800.
It is good to sell on rallies around 0.9075-80 with SL around 0.9150 for the TPof 0.9000/0.8800
10. 10 www.econotimes.com
Trade Idea
We prefer to long GBP/JPY at dips
● GBP/JPY has made a high of 174.17 on Friday and started to decline from that level .It is currently trading around 172.99.
● Short term trend is still bullish as long as support 170.50 (Kijun-Sen) holds. Any break below Kijun-Sen will drag the pair
down till 169.95/169.
● On the higher side major resistance is around 174.30 (200 day 4HMA) and any break above will take the pair to next level
till 175/176.27.
It is good to buyat dips around 172-172.25with SL around 170.50 for theTPof 175/176.25
RESISTANCELEVELS SUPPORT LEVELS
R1-174.30 S1-170.50
R2-175.00 S2-169.90
R3-176.30 S3- 169.00