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Market Recap
● World stocks jumped on ECB's hint of additional
monetary easing and bargain-hunting from bruised
investors.
● The FTSEuroFirst 300 index of leading European
shares rose 2.2pct in early deals, on track to record
a weekly gain of around 2 percent. Germany's DAX
climbed 2 percent and heading for a weekly gain of
2.2 percent. Britain's FTSE 100 was up 1.8 percent
on the day and France's CAC 40 inched higher 2.5
percent.
● Japan's Nikkei ended up 5.9 percent, the most in
more than four months. Chinese stocks rose 1.3pct.
MSCI's broadest index of Asia -Pacific shares out-
side Japan jumped 2.4 percent on Friday, the most
since Oct.7 last year, after hitting a 4-year low on
Thursday. HK's Hang Seng Index lost 2.3 pct for
the week.
● Oil climbed 5pct to above $30 in its largest weekly
rally in three months, as firmer financial markets
made the way for traders to cash in on record short
positions. Brent rose $1.58 at $30.83 per barrel by
0944 G MT, off this week's 2003 low of $27.10 and
heading for a more than 6 percent weekly gain. U.S.
crude was up $1.35 at $30.88 per barrel, set for a
weekly rise of over 4 percent.
● Gold dropped as the euro slid after the ECB hinted
at further policy easing and weaker growth across
emerging economies. Spot gold fell 0.5 percent at
$1,096.20 per ounce at 1030 GMT, while U.S. gold
futures for February delivery were down 60 cents
an ounce at $1,097.60.
Treasuries
● U.S. 10-year Treasuries yield rose 4 basis points
to 2.06pct, and the yield curve - the gap between 2
- and 10-year yields - steepened from a multi -year
low to around 119 basis points.
● German 5-year bond yield hit record low at -0.246
percent, while 2-year bond yield hit record low at -
0.456 percent.
● UK March Gilts edged slightly higher on the UK
retail sales data to 119.00.
● Australian government bond futures eased, with
the 3-year bond contract off 4 ticks at 98.060. The
10-year contract dropped 3 ticks to 97.2800, while
the 20-year contract lost 3.5 ticks to 96.7800. New
Zealand government bonds were slightly firmer
with yields down between half and 1.5 ticks.
Market Briefs
● DXY firms on day, on track for slight weekly gain.
Plays 99.113-99.461.
● USD/JPY extends recovery to 118.32 fm year's
low (Wed) at 115.97.
● Euro pressured after Draghi signals more easing.
EUR/USD 1.0900- 1.0813.
● GBP/USD recovery rally extends to 1.4307 fm 7-
year 1.4080 low (Thurs).
● Brent gains 5.5% to $31.10/barrel. Off this week's
2003 low of $27.10.
● Asia stocks end week rallying off 4-yr lows, helped
by ECB, oil bounce.
● UK Q4 Retail Sales +1.1% q/q vs previous 0.9%.
Strongest calendar quarter since Q4 2014. 3.7% y/
y vs 4.9%.
● EZ Jan flash Mfg PMI 52.3 vs previous 53.2. 53.0
exp. Flash Services PMI 53.6 vs previous 54.2. 54.2
expected.
● EZ Jan flash Composite PMI 53.5 vs previous 54.3.
54.2 expected.
● PBOC Zhang: China won't easily cut RRR - SINA.
Institutional Positions
● Morgan Stanley: Long USD/BRL, entry 3.9600, target
4.4000, stop 3.7000.
● Morgan Stanley: Long USD/PEN, entry 3.4200, target
3.6000, stop 3.3600.
● Morgan Stanley: Long USD/TRY, entry 2.9600, target
3.1500, stop 2.8800.
● Morgan Stanley: We recommend going long JPY/TWD, as
a complement to our long JPY/KRW position and in order
to diversify our risk to an extent.
● Morgan Stanley: Long EUR/AUD, entry 1.5410, target
1.6200, stop 1.4850.
● Morgan Stanley: Sell CHF/JPY, entry 119.50, target
112.00, stop 122.30.
● Morgan Stanley: We maintain our limit order to buy USD/
BRL on dips.
● Morgan Stanley: With a risk-off bias, adding short CHF/
JPY to our existing long JPY vs. KRW and TWD positions.
● Morgan Stanley: Sell NZD/USD and buy EUR/AUD.
● Morgan Stanley: We remain USD bulls even if US data
weaken over the next few months.
● Morgan Stanley: Trading long current-account surplus
currencies such as the JPY, EUR and SEK remains an im-
portant part of our investment strategy.
3. Economic Data Preview
● (0830 ET/1330 GMT) Fed Reserve Bank of Chi-
cago due to release National Activity Index for De-
cember.
● (0830 ET/1330 GMT) Canada's annual inflation
rate is likely to have risen to 1.7pct in December
from 1.4pct in November. Last month's annual core
inflation rate is estimated at 2.1 percent, up from 2
percent the previous month.
● (0830 ET/1330 G MT) Canada's November retail
sales likely rose 0.2pct in comparison to a 0.1 per-
cent gain in October.
● (0945 ET/1445 GMT) The financial firm Markit
releases US manufacturing PMI for January, which
is expected to stay at 51.1, slightly down from 51.2
prior month.
● (1000 ET/1500 GMT) The National Association of
U.S. Realtors is expected to report existing home
sales for December, which likely rose 8.9pct to an
annual rate of 5.20 million units, compared to No-
vember's sharp drop of 10.5pct to an annual rate of
4.76 million units.
● (1000 ET/1500 GMT) The Conference Board will
release its Leading Economic Index, which is likely
to have dropped 0.1pct in December, compared
with the 0.4 percent rise in November.
● (1300 ET/1800 GMT) Baker Hughes US Oil Rig
Count.
Key Events
● (1045 ET/1545 GMT) FedTrade Operation 30-year
Fannie Mae / Freddie Mac (max $1.950 bn).
Top News
● Euro area inflation expectations declined over the
past quarter and even longer-term forecasts are on
the decline, the ECB’s Survey of Professional Fore-
casters showed on Friday.
● Eurozone businesses had a much poorer start to
2016 th an expected as deeper price cuts and weak
euro making goods and services cheaper abroad
failed to drive any meaningful demand, a survey
showed.
● International Monetary Fund managing director
Christine Lagarde launched her campaign for a sec-
ond term on Friday with ringing endorsements from
a host of major economies and a court case against
her looming in her native France.
● Oil prices are unexpected to return to the highs of
recent years, and the strain on Russia’s economy
will leave the government facing difficult choices,
the head of the country's central bank said on Fri-
day.
● UK retail spending suffered its biggest year-on-
year fall in over six years during the crucial Christ-
mas selling season, but there was more cheer for
finance minister George Osborne after government
borrowing dropped sharply.
● Renewed turmoil in global markets is beginning to
erode investor confidence in Japanese Prime Min-
ister Shinzo Abe's pledge to revitalise the economy
through his massive 'Abenomics' stimulus pro-
gramme.
● China's money rates spiked this week as banks
hoarded cash in preparation for the long Lunar New
Year festival, but traders believe the increase is
largely seasonal and is being tempered by massive
injections by the central bank.
● Indonesia central bank expects temporary addi-
tional inflationary pressure due to a recently im-
posed value added tax on imported cattle, Gover-
nor Agus Martowardojo said on Friday.
●The Indian government will pay banks a 2.5 per-
cent commission to unlock the country's massive
stash of gold under a new monetization scheme,
the central bank said, as the ambitious plan re-
ceived a poor response from banks and customers.
● Argentine President Mauricio Macri said on Friday
that progress in talks with U.S. creditors in a long-
running legal battle over unpaid debt was "not so
good", although he hoped to reach a settlement
early this year.
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FundamentalAnalysis
Risks skewed to the downside for Euro area
The ECB held rates at 0.05 pct in yesterday's meet and Draghi
at the post meeting press conference noted that there that
downside risks were increasing again. He expressed concern
over the poor inflation outlook and signaled that more quan-
titative easing might be in store when the central bank meets
in March. Growing concerns about the durability of the US
growth outlook and major geopolitical risks around Europe,
both external and internal, including the ongoing migration
crisis, the Russian-Ukraine conflict, terrorist attacks/threats
and rising populists and centrifugal-forces in Europe has
cooled the pace of growth in euro area business activity at
the start of 2016.
Data firm Markit released earlier today showed a slowdown
in manufacturing and services activity in the eurozone in
January. Markit manufacturing Purchasing Managers’ Index
hit a three-month low at 52.3, while its services PMI reached
a 12-month low at 53.6. Uncertainty caused by the marked
FX volatility and growth concerns coming from EM, in par-
ticular the weakness in the CNY and the uncertain growth
outlook of China have shifted the balance of risks more to the
downside. While China has declared that it is planning to fo-
cus on a stable NEER, implying a move in USD/CNY to 6.80
by year-end, the CNY (on NEER basis) has been depreciating
rapidly recently, and if China allows, for example, a 5% fall in
the CNY NEER by year-end, USD/CNY could move to as high
as 7.22.
The deterioration in business sentiment in both the US and
China, as well as in other large emerging markets, coupled
with a large sell-off in commodities and oil shows a very mod-
est pickup in global growth sustained by a gradual recovery in
Europe. The comparatively more positive outlook for Europe
is largely supported by low oil prices, ECB’s ultra-loose mone-
tary policy, and the euro below its “fair value”, all of which
support a relatively strong consumer demand.
Draghi at the presser also strongly defended the ECB's De-
cember’s stimulus package saying that the change that has
come about post its December meeting owing to sharp de-
cline in oil price. The plunge in the oil price to below $30 per
barrel means that CPI inflation could average as little as 0.2
percent this year – well below the ECB's current forecast of 1
per cent. In the current scenario, the ECB looks likely to revise
down inflation projections in March from the current level of
1 per cent for 2016 and 1.6 per cent for 2017. Concerns over
the poor inflation outlook have certainly increased the
chances of the ECB eventually providing more policy support.
European stocks jumped Friday, extended a rally founded on
the possibility the European Central Bank will enact more
stimulus measures for the eurozone economy. Europe's
FTSEurofirst 300 index jumped 2.1 per cent, while euro fell to
a two-week low against the dollar. On the day, EUR/USD was
little changed around $1.0845, down around -0.3494% from
Thursday's close.
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Economy Watch
● ECB’s SPF maintains GDP growth forecasts for both 2016 and 2017 in 1.7-1.8 pct range.
● ECB’s SPF sees 2018 inflation at 1.6 pct; cuts longer term view to 1.8 pct from 1.9 pct.
● ECB’s SPF sees 2017 euro zone inflation at 1.4 pct vs 1.5 pct seen in Q4.
● ECB’s survey of professional forecasters sees 2016 euro zone inflation at 0.7 pct vs previous 1.0 pct seen in Q4 survey.
● German FinMin Schaeuble says he would prefer higher interest rates, the interest rate is no longer fulfilling its economic
function at present.
● Russia's Sberbank sees 2016 core tier 1 capital adequacy under Basel 1 for Sberbank group above 9 pct.
● Russia's Sberbank sees Russian economy declining by 2.2 pct in 2016 if oil averages $35 a barrel.
● Russian Deputy Finance Minister: 2016 borrowing plan on domestic markets will only be exceeded if 'acute necessity' – RIA.
● Russia c.bank governor says oil prices could change direction and jump higher at any stage.
● Brazil's economy sheds 596,208 jobs in December - Labor ministry (Reuters Survey -655,000).
● Reuters Survey- South Africa's average CPI seen at 6.0 pct in 2016 and 6.1 pct 2017 (5.9, 5.8 pct in Dec poll).
● Reuters Survey- South African GDP growth expected at 0.9 pct in 2016, 1.7 pct in 2017 (1.6, 2.1 pct in Dec poll).
● Greek economy to stay in recession in 2016, contracting a bit more than in 2015- IOBE think tank.
● PBoC: To expand macro-prudential management to cross-border financing.
● China Labor Ministry expects job market to maintain stable in 2016.
● Portugal government 2016 draft budget forecasts decline of 0.2 percentage points in structural budget deficit.
● Portugal government says draft budget sees 2.1 pct growth in 2016.
● Portugal government 2016 draft budget sees budget deficit at 2.6 pct/GDP.
Policy Watch
● RBADanmarks Nationalbank (DN) to mirror a 10bp ECB rate cut in March and lower the rate of interest on certificates of
deposit to minus 0.75%- Danske Bank.
● Reuters Survey - 5 of Canada's 11 primary dealers see another rate cut from Bank of Canada, three see cut before end of
Q2 2016.
● Reuters Survey- South Africa's repo rate seen ending 2016 at 7.25 pct, 7.00 pct end-2017 (6.75, 7.00 pct in Dec poll).
● Reuters Survey- South Africa's Reserve Bank to raise interest rates 50 basis points to 6.75 pct on Jan 28.
● PBoC: Financial institutions and firms in pilot areas no longer need approval for overseas borrowing.
● Russia c.bank governor says bank has all tools to prevent threats to financial stability.
● ECB's Draghi says there is still high level on non-performing loans in Greece, need changes in financial legislation.
● ECB's Draghi says we see recovery continuing at modest pace.
● ECB's Draghi says drivers of European recovery are monetary policy, also oil prices, neutral fiscal policy.
● Reuters Survey: All 12 economists surveyed see Bank of Israel holding key rate at 0.1 pct next week.
Trade Views
● The 7 January 10bp DN rate hike should be sufficient to stabilise EUR/DKK close to the central rate and we expect EUR/
DKK to trade at 7.4550 in 1m-12m- Danske Bank.
● Mexico's peso weakens more than 1 pct to 18.725 per dollar.
● The USD will likely stay supported against commodity currencies – Barclays.
● AUD and EM Asian currencies of economies with stronger trade links to china such as KRW, TWD, SGD and MYR are likely
to underperform- Barclays.
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Hedging Perspectives
Hedge open Aussie export payable exposure via AUD/USD PRBS:
If you are running an open Aussie export deal and you want to make sure the certain profit or curb the losses, and keep your
foreign trade active without forex hassles, you could hedge this ongoing bearish trend in AUD with an option. The effect of an
option hedge is to keep the profit potential open, yet limit (hedge) any loss.
AUD/USD has dropped from the high of 0.7327 up to 0.6926 and still have more downside potential as per the OTC market
sentiments, with the current levels of 0.7033 one can build hedging strategy as explained below contemplating above IVs and
risk reversal computations.
From the IV & delta risk reversal table, it is understood that AUD/USD is the pair to perceive highest IVs with most expensiv e
puts for hedging downside risks.
25- Delta risk reversal points out the premiums of AUD/USD puts and calls on the most liquid OTM contracts due the differ-
ence vols, which in turn divulge the relative costliness of the downside protection for the underlying spot FX, so we can an-
ticipate next underlying market downward direction with help of these negative numbers.
Hedging strategy: AUD/USD Put Ratio Back Spread
Options are generally used by private investors and businesses to hedge open or future deals. The latter is useful for compa-
nies who have overseas invoices to pay or profits to receive in a foreign currency.
We now capitalize upon higher IVS and any upswings in abrupt can be utilized by employing 2 lots of 1.5% ITM shorts in puts
with shorter expiries.
We stated to maintain the same strategy for hedgers by using these small bounces from then to help our ITM shorts, this
would have certainly ensured returns in the form of premiums.
Having said that, stay firm with any existing longs on at the money -0.50 delta puts as it would begin functioning effectively
from recent past. Add one more long on 1% out of the money put in order to give leveraging effects to the portfolio with
lesser cost of trade since we prefer OTM instrument.
Hence, as shown in the diagram the strategy is constructed in the ratio of 3:2 for net credit with net delta at -0.50.
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Technical Analysis
GBP/USD breaks minor resistance around 1.4250, jump till 1.4330 is possible
Major resistance – 1.4250
● The pair has broken major resistance around 1.4250 and jumped till 1.42725 at the time of writing. Any break above 1.4250
will drag the pair up till 1.4300//1.4326 (55 day 4 EMA)/1.4340 level in short term.
● Overall bearish invalidation is only above 1.43600.
● On the downside minor support is around 1.4210 (5 day MA) and any break below targets 1.4160/1.4120/1.4070 level. The
minor support is around 1.4240.
It is good to buyat dips around 1.4250-55 with SL around 1.4200for the TP of 1.4330/1.4358
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Trade Idea
We prefer to long GBP/JPY at dips
Major resistance – 167.85 (Tenken-Sen)
Major intraday Support -166.80 (5 day MA)
● GBP/JPY has broken major resistance around 167.85 and jumped till 169. It is currently trading around 168.72.
● It is facing resistance around 169.10 and any break above confirms major trend reversal, a jump till 170.50/172 is possible.
● On the lower side major intraday support is around 166.80 and break below targets 166/164.
● Overall trend reversal can happen if it closes above 172 level.
It is good to buyat dips around 168 with SL around 166.80for the TP of 170.50/172
RESISTANCELEVELS SUPPORT LEVELS
R1-169.10 S1-166.80
R2-170.50 S2-165.00
R3-172.00 S3- 164.00