fx strategy - 26 january prb · 1/26/2016 · fx strategy | 26 january 2016 this commentary...

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. Important disclosures can be found in the Disclosures Appendix. This document is provided for general circulation and information purposes only, it does not take into account the

specific investment objectives, needs or financial situation of any particular person or class of persons and it has not been prepared as investment advice for such person(s). ‘Person’ includes a corporation, co-operative society, trade union, sole proprietorship, partnership,

limited liability partnership and any other business entity. Prospective investors should seek advice from a financial adviser on the suitability of an investment, taking into account these factors before making a commitment to invest in an investment.

1

fx strategy fx | 26 January 2016This reflects the views of the Wealth Management Group

For Malaysia circulation only

Central banks in the limelight again • A rebound in investor sentiment supported heavily oversold currencies, especially the GBP and CAD. However, focus is now likely to turn

to upcoming US and Japan central bank policy meetings. A dovish Fed or the BOJ hinting towards more policy action is likely be positive for markets.

• Given weaker than expected New Zealand inflation, we see an increased probability for the RBNZ to signal further easing. Upcoming RBNZ policy meeting likely to set the tone.

• In the upcoming week, the FOMC, BOJ and the RBNZ policy meeting, Euro area inflation estimates and US consumer confidence data is likely to be key.

Pairs Outlook (2-4 wk) Summary comments Support 2 Support 1 Spot Resistance 1 Resistance 2

EUR/USD Neutral Directional indicators weak 1.070 1.080 1.081 1.100 1.125

USD/JPY Bullish Likely to continue rebound 116.50 118.50 118.75 120.00 121.50

AUD/USD Neutral Limited upside ahead of key resistance cluster 0.650 0.690 0.702 0.725 0.740

USD/SGD Neutral Near-term resistance to limit short-term upside 1.400 1.425 1.428 1.450 1.460

GBP/USD Bullish Likely to continue oversold rebound 1.400 1.425 1.430 1.460 1.480

USD/MYR Bearish Limited upside as it is skewed towards a downward trend. 4.400 4.355 4.285 4.225 4.165

XAU/USD Neutral Likely to trade between 1,080 and 1,150 near term 1050 1,080 1101 1,110 1,150

NZD/USD Bearish Rebound likely to be temporary and limited 0.600 0.625 0.651 0.660 0.685

EUR/GBP Neutral Some consolidation likely following overbought correction 0.720 0.740 0.756 0.770 0.790

USD/CNH Neutral Weak short term directional indicators 6.40 6.50 6.610 6.70 6.75

USD/CHF Bullish Likely to continue firm uptrend 0.980 1.000 1.014 1.030 1.040

USD/CAD Bearish Correction likely to continue towards key 1.40 support 1.380 1.400 1.416 1.450 1.460

AUD/NZD Neutral Rebound running into a strong resistance region 1.030 1.050 1.077 1.080 1.100

*Darker shade indicates more important technical level

fx strategy | 26 January 2016

This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank. 2

Contents

Central banks in the limelight again 1

3 and 12 month outlook 3

2-4 week outlook 3

FX trade notes 3

Week in Review 4

EUR/USD 5

USD/JPY 6

AUD/USD 7

USD/SGD 8

GBP/USD 9

USD/MYR 10

XAU/USD 11

NZD/USD 12

Interest Rate Differentials 16

FX Implied Volatility 17

Consensus forecasts and forwards 18

Disclosure Appendix 20

Steve Brice Chief Investment Strategist

Clive McDonnell Head, Equity Investment Strategy

Manpreet Gill Head, FICC Investment Strategy

Adi Monappa, CFA Head, Asset Allocation & Portfolio construction

Audrey Goh, CFA Director, Asset Allocation & Portfolio construction

Rajat Bhattacharya Investment Strategist

Victor Teo, CFA Investment Strategist

Tariq Ali, CFA Investment Strategist

Abhilash Narayan Investment Strategist



3 and 12 month outlook 2-4 week outlook

Pairs Outlook (2-4 wk)

EUR/USD Neutral

USD/JPY Bullish

AUD/USD Neutral

USD/SGD Neutral

GBP/USD Bullish

USD/ MYR Bearish

XAU/USD Neutral

NZD/USD Bearish

EUR/GBP Neutral

USD/CNH Neutral

USD/CHF Bullish

USD/CAD Bearish

AUD/NZD Neutral

FX trade notes

Initiation date Pairs Position

Entry price

Current price Target Stop

15/01/2016 USD/JPY Long 117.68 118.75 122.00 115.00

22/01/2016 GBP/USD Long 1.421 1.430 1.490 1.385

Currency 3 month 12 month

EUR � �

JPY � �

GBP � �

AUD � �

NZD � �

CAD � �

CHF � �

CNY � �

TWD � �

KRW � �

SGD � �

MYR � �

IDR � �

INR � �

THB � �

PHP � �

� Bullish � Neutral � Bearish

Source: Bloomberg, Standard Chartered



Week in Review

Weekly performance of core pairs

15 January 2016 to 22 January 2016

Weekly performance of supplementary pairs

15 January 2016 to 22 January 2016


Pairs Week in Review

EUR/USD EUR/USD ended lower (-1.10%) over the previous week. The EUR gained initially on continued weakness in global equities and risk sentiment. However, the EUR pared gains after ECB President Mario Draghi said all options for further stimulus remained open.

USD/JPY USD/JPY ended up (1.54%) over the previous week. An improvement in market sentiment near the end of the week saw USD/JPY bounce from technically oversold levels. In addition, BoJ market speculation of possible BOJ action amid deflationary threats, also weighed-in.

AUD/USD AUD/USD ended up (2.01%) over the previous week. The AUD bounced during the week, along with equities and commodities, supported by an improvement in investor sentiment.

USD/SGD USD/SGD was down (-0.67%) over the previous week. Singapore data was mixed – November retail sales were in line with expectations while December exports disappointed.

GBP/USD GBP/USD ended flat over the previous week. The GBP fell to multi-year lows during the week before recovering. The GBP continued to closely follow sentiment in financial markets. UK core inflation and employment data exceeded expectations, while retail sales disappointed.

USD/MYR USD/MYR ended lower (-2.36%) over the previous week. The MYR reversed earlier losses and strengthened end of last week with a rebound in oil prices. Malaysia data were in line with market consensus.

XAU/USD XAU/USD was up (0.83%) over the previous week. Improved sentiment on risk assets was negative for gold.

NZD/USD NZD/USD ended up (0.46 %) over the previous week. Weaker-than-expected Q4 inflation and a deceleration in December housing prices likely contributed to NZD’s negative sentiment.

0.46%

0.83%

0.05%

-0.67%

2.01%

1.54%

-1.10%

-3.00% -1.00% 1.00% 3.00%

NZD/USD

XAU/USD

GBP/USD

USD/SGD

AUD/USD

USD/JPY

EUR/USD

%

1.59%

-2.90%

1.49%

0.00%

-1.11%

-4.00% -2.00% 0.00% 2.00% 4.00%

AUD/NZD

USD/CAD

USD/CHF

USD/CNH

EUR/GBP

%



EUR/USD We turn neutral on the EUR/USD (from bearish earlier) amid weakening directional indicators

Neutral

Key technical indicators*

Technical Indicator Action

RSI (14) Neutral

Oscillator (5,10) Neutral

MACD (12,26,9) Neutral

ADX (14) Neutral

Momentum (14) Neutral

Key Levels Level Importance

Resistance 2 1.125 Medium

Resistance 1 1.100 High

Spot 1.081 –

Support 1 1.080 Medium


Key Signposts

FOMC meeting 28 Jan

Euro area inflation estimate

29 Jan

* Please see Appendix for explanation on technical


Fundamental Overview

• Communication from the Fed in the upcoming week will be key following Draghi’s comments

that suggested the ECB could act again given increasing risks to the outlook for Euro area

inflation. A more dovish Fed outlook, however, may dampen sentiment toward the USD and

support the EUR to some extent. Euro area and German CPI inflation estimates are also key.

Technical Analysis

• The technical outlook for the EUR remains negative from a slightly longer term perspective on

weekly charts. However, in the short term, weak momentum and directional indicators suggest

the pair may remain constrained in a range. On the top side, 1.100 remains the key resistance

region. On the lower side, the 1.080-1.070 region is likely to offer some interim support, a

breach of which may pave the way to 1.050.

EUR/USD finding some interim support


1.080

1.100

1.03

1.06

1.09

1.12

1.15

1.18

1.21

1.24

1.27

1.30

Jan-15 Mar-15 May-15 Jun-15 Aug-15 Oct-15 Dec-15 Jan-16

EU

R/U

SD

EUR/USD 50DMA 100DMA 200DMA



USD/JPY We expect the pair to continue to rebound from a key support region amid improving momentum.

Bullish



RSI (14) Neutral

Oscillator (5,10) Buy

MACD (12,26,9) Buy

ADX (14) Sell





Spot 118.75 –

Support 1 118.50 High


Key Signposts

BOJ policy meeting 18 Jan

FOMC meeting 20 Jan




• The strong rebound in global equity markets along with oil seems likely to continue in the

week ahead. On the same note, we believe the USD/JPY rally is likely to pick up steam.

Moreover, markets are now likely to be more vigilant to the possibility of further BoJ action

given the sharp appreciation in JPY’s trade-weighted exchange rate.

Technical Analysis

• The pair seems to be forming a bottom around the 116-117 support cluster region. The breach

of the key resistance at 118.50 suggests the upside is likely to continue for the pair. Short-

term technical indicators are also signalling renewed buying interest. Next key resistance is

likely around the 120 mark.

USD/JPY likely to rebound from support


118.50

120.00

112

114

116

118

120

122

124

126


US

D/J

PY

USD/JPY 50DMA 100DMA 200DMA



AUD/USD We remain neutral on AUD/USD amid expectations of a consolidation following the sell-off.

Neutral



RSI (14) Neutral



ADX (14) Neutral





Spot 0.702


Support 2 0.650 Low

Key Signposts

Australia CPI y/y 27 January




• The bounce in the AUD seems to have been more of a knee-jerk reaction following buoyant

market sentiment near the end of the week. However, we see limited upside from current

levels as broad commodity price weakness and USD strength remain key headwinds. The

upcoming inflation data and a more hawkish Fed are the main risks in the near term.

Technical Analysis

• The bounce in the AUD above the key resistance of 0.700 suggests the pair may have limited

downside for now. However, we also see a number of key resistance points between 0.715

and 0.720, which may limit upside for the time being. From a longer-term perspective, the

bearish trend channel remains intact.

AUD/USD more resilient following recovery in market sentiment


0.690

0.725

0.65

0.68

0.71

0.74

0.77

0.80

0.83

0.86

0.89

Feb-15

AU

D/U

SD

AUD/USD 50DMA 100DMA 200DMA



USD/SGD We remain neutral on USD/SGD and would wait for better levels to re-initiate directional views.

Neutral



RSI (14) Neutral

Oscillator (5,10) Sell

MACD (12,26,9) Sell

ADX (14) Buy





Spot 1.428 –



Key Signposts

Singapore industrial production

26 January




• SGD has largely followed Asia-ex-Japan currencies in recent weeks. Recent data too has

been largely mixed. However, we expect domestic inflationary pressures to have increased

following the sharp fall in oil prices. Further action by the MAS remains a possibility at the April

policy meeting.

Technical Analysis

• While the broader medium-term uptrend remains intact, there is a possibility of some

consolidation in the immediate term. However, we expect downside to be limited to 1.425, a

key support region and convergence of the 50-100DMA. On the topside, a breach of 1.45 is

required as a convincing bullish indicator.

USD/SGD likely to consolidate short term


1.425

1.450

1.25

1.30

1.35

1.40

1.45

1.50


US

D/S

GD

USD/SGD 50DMA 100DMA 200DMA



GBP/USD We remain bullish on the GBP amid continuation of the oversold rebound

Bullish



RSI (14) Buy



ADX (14) Sell



Resistance 2 1.480 Low


Spot 1.430 –



Key Signposts

UK GDP y/y 19 Jan




• In the week ahead, the GBP is likely to continue to track the performance of global financial

markets. UK’s Q4 GDP report will be key. Overall, we continue to believe that recovery in the

UK broadly remains on track while the GBP weakened excessively. The trade-weighted GBP

now trades at the lowest level since early 2014.

Technical Analysis

• The pair rebounded last week from a key support region amid oversold levels. The pair has

managed to close positive on three consecutive days since then, suggesting sufficient buying

interest in the pair. The RSI line crossing the 30 mark from the bottom first time this year is

also re-enforce bullish momentum. The next major resistance hurdle also lies higher at 1.460.

GBP/USD likely to continue rebound from oversold levels


1.425

1.460

1.40

1.45

1.50

1.55

1.60

1.65

Mar-15 Apr-15 May-15 Jul-15 Aug-15 Oct-15 Nov-15 Jan-16

GB

P/U

SD

GBP/USD 50DMA 100DMA 200DMA



USD/MYR We turn bearish on the USD/MYR (from neutral earlier) as current momentum is skewed towards the downside.


• We see limited upside on the pair given the weak momentum and heavy sell-off last week.

• Bank Negara Malaysia maintained the overnight policy rate at 3.25% with the stance of monetary policy remaining accommodative and supportive of economic activity. However, the central bank unexpectedly cut the statutory reserve requirement by 50bps to 3.50%. Malaysia's inflation increased marginally to 2.7% y/y in December 2015 (vs. 2.6% y/y in November 2015).

Technical Analysis

• The pair sold off sharply over the previous week after breaking a few key support levels. A breach of key support 4.225 would likely trigger further downside whereas the topside for the pair is likely capped at key resistance 4.355. We are bearish on the pair given the negative bias in technical indicators.

USD/MYR is skewed towards a downward trend


Bearish



RSI (14) Neutral


MACD (12,26,9) Sell

ADX (14) Sell

Momentum (14) Sell




Spot 4.285 –



Key Signposts

No key signposts this week



4.225

4.355

2.90

3.10

3.30

3.50

3.70

3.90

4.10

4.30

4.50

4.70

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

US

D/M

YR

USD/MYR 50 dma 100 dma 200 dma



XAU/USD We remain neutral on gold and expect it to trade rangebound between 1,080 and 1,150.

Neutral

Key technical indicators and forecast*


RSI (14) Neutral



ADX (14) Neutral



Resistance 2 1150 High

Resistance 1 1110 High

Spot 1101 –

Support 1 1080 High

Support 2 1050 High

Key Signposts

FOMC meeting 28 Jan

Euro area inflation estimate

29 Jan




• The pick up in financial market volatility saw some support for gold, although the stronger US

jobs report limited gains. In the absence of a major pickup in inflation, we believe gold is likely

to continue to trade sideways.

Technical Analysis

• Gold’s uptrend from mid-December lows has continued, though strong resistance ahead of the

100DMA is likely to limit further upside in the short term. Directional and momentum indicators

have also weakened. We continue to expect gold to trade between 1,080 and 1,150 in the

short term.

XAU/USD upside facing resistance


1,080

1,110

1,000

1,050

1,100

1,150

1,200

1,250

1,300


XA

U/U

SD

XAU/USD 50DMA 100DMA 200DMA



NZD/USD We turn bearish on the NZD (from neutral earlier), expecting the pair to test the next key support.

Bearish

Key technical indicators and forecast*


RSI (14) Neutral



ADX (14) Sell



Resistance 2 0.685 Low


Spot 0.651 –



Key Signposts

RBNZ policy meeting 28 January




• Given weaker inflation figures from Q4, we believe deflation risks in New Zealand have

increased, especially with the latest decline in oil prices. The RBNZ meeting later this week

may provide more clarity on this front. In this context, we believe the probability of further

policy easing has increased.

Technical Analysis

• The break below the key support of 0.650 (near the November low) has further accelerated

downside momentum. This opens up the possibility of a further downmove towards the

September low of 0.625. On the upside, 0.660 (near convergence of 50-100-200DMA) is likely

to limit upside.

NZD/USD likely to test the next key support


0.625

0.660

0.58

0.63

0.68

0.73

0.78

0.83


NZ

D/U

SD

NZD/USD 50DMA 100DMA 200DMA



SUPPLEMENTARY PAIRS

We turn neutral on EUR/GBP (from bearish earlier) View

Neutral

• Overbought technical indicators

have corrected

• Longer term trend indicators

suggest a bullish bias

• Prefer to wait as GBP likely to

recover ground against most peers

We remain neutral on USD/CNH View

Neutral

• The pair maintains uptrend, though

momentum indicators seem to be

slowing

• Prefer to wait for more convincing

upside indicators


0.740

0.770

0.68

0.70

0.72

0.74

0.76

0.78

0.80


EU

R/G

BP

EUR/GBP 50DMA 100DMA 200DMA

6.500

6.700

6.1

6.2

6.3

6.4

6.5

6.6

6.7

6.8


US

D/C

NH

USD/CNH 50DMA 100DMA 200DMA



SUPPLEMENTARY PAIRS (cont’d)

We turn bullish on USD/CHF (from neutral earlier) View

Bullish

• Upward trend has firmed recently

• Lower demand for safe haven

should support USD/CHF

We remain bearish on USD/CAD View

Bearish

• USD/CAD corrected sharply,

following the rebound in oil prices

• CAD likely to extend its rally along

with global stocks and commodities


1.000

1.030

0.89

0.92

0.95

0.98

1.01

1.04


US

D/C

HF

USD/CHF 50DMA 100DMA 200DMA

1.400

1.450

1.10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50


US

D/C

AD

USD/CAD 50DMA 100DMA 200DMA



SUPPLEMENTARY PAIRS (cont’d)

We turn neutral on AUD/NZD (from bullish earlier) View

Neutral

• Likely to see strong resistance

between the 1.08 and 1.10 region

• Converging 50-100-200DMAs

suggest medium term drection

more uncertain.


1.050

1.080

1.00

1.05

1.10

1.15

1.20


AU

D/N

ZD

AUD/NZD 50DMA 100DMA 200DMA



Interest Rate Differentials

EUR/USD USD/JPY AUD/USD

GBP/USD NZD/USD USD/CAD


1.0

1.1

1.2

1.3

1.4

-1.75

-1.45

-1.15

-0.85

-0.55

-0.25

0.05

0.35

Jan-13 Oct-13 Jul-14 Apr-15 Jan-16

EU

R/U

SD

%

EUR/USD 2-year interest rate differential

EUR/USD (RHS)

85

95

105

115

125

135

0.10

0.25

0.40

0.55

0.70

0.85

1.00

1.15

1.30

1.45


US

D/J

PY

%

USD/JPY 2-year interest rate differntial

USD/JPY (RHS)

0.6

0.7

0.8

0.9

1.0

1.1

0.0

1.0

2.0

3.0


AU

D/U

SD

%

AUD/USD 2-year interest rate differntial

AUD/USD (RHS)

1.42

1.52

1.62

1.72

-0.5

0.0

0.5

1.0


GB

P/U

SD

%

GBP/USD 2-year interest rate differntial

GBP/USD (RHS)

0.6

0.7

0.8

0.9

0.0

1.0

2.0

3.0

4.0

5.0


NZ

D/U

SD

%

NZD/USD 2-year interest rate differntial

NZD/USD (RHS)

0.8

1.0

1.2

1.4

1.6

-1.5

-1.0

-0.5

0.0

0.5

1.0


US

D/C

AD

%

USD/CAD 2-year interest rate differntial

USD/CAD (RHS)



FX Implied Volatility

EUR/USD USD/JPY AUD/USD

GBP/USD NZD/USD USD/CAD


0

5

10

15


%

EUR 1M implied vol

0

5

10

15

20


%

JPY 1M implied vol

4

6

8

10

12

14

16

18


%

AUD 1M implied vol

4

6

8

10

12

14


%

GBP 1M implied vol

4

6

8

10

12

14

16

18


%

NZD 1M implied vol

3

5

7

9

11

13


%

CAD 1M implied vol



Consensus forecasts and forwards

Consensus Forecasts Spot Q1 2016 Q2 2016 Q3 2016 Q4 2016 Forward Q1 2016 Q2 2016 Q3 2016 Q4 2016

EUR/USD 1.10 1.06 1.05 1.05 1.07 1.08 1.09 1.09 1.10

USD/JPY 118 123 123 124 125 118 118 118 117

AUD/USD 0.70 0.70 0.69 0.69 0.69 0.70 0.70 0.70 0.69

NZD/USD 0.65 0.64 0.63 0.64 0.63 0.65 0.64 0.64 0.64

USD/SGD 1.43 1.44 1.45 1.46 1.47 1.43 1.43 1.44 1.44

GBP/USD 1.43 1.50 1.49 1.51 1.52 1.43 1.43 1.44 1.44

USD/CAD 1.41 1.38 1.38 1.36 1.35 1.41 1.41 1.41 1.41

USD/CHF 1.10 1.09 1.09 1.10 1.10 1.01 1.01 1.01 1.00




TECHNICAL INDICATORS – EXPLANATORY APPENDIX

RSI (Relative Strength Index) – The RSI indicators can be used to describe the speed at which prices move over a given time period. An RSI

above 70 can indicate a currency pair is overbought while an RSI below 30 can indicate the pair is oversold.

Stochastic Oscillator – The Stochastic Oscillator compares where a security's price closed relative to its trading range over a given time period.

The security or index is generally considered oversold when the Oscillator falls to 20%, while a reading of 80% is considered overbought.

MACD (The Moving Average Convergence/Divergence) – This indicator shows the relationship between two moving averages of prices. A

bearish signal is provided when the main moving average line drops below the second moving average line, and vice versa.

ADX (Average Directional Index) – This indicator quantifies a trend's strength regardless of whether it is up or down. An index rising above zero

provides a bullish signal while an index falling below zero provides a bearish signal.

Momentum Indicator – The momentum of a security is the ratio of today's price compared to the price at a given point in the past. If the

security's price is higher today, the momentum indicator will be considered strong. If the security's price is lower today, the momentum Indicator

will be weak.


20

Disclosure Appendix

This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence

of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not

necessarily represent the views of every function within Standard Chartered Bank, (“SCB”) particularly those of the Global Research function.

Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference Number ZC18. The Principal Office of

the Company is situated in England at 1 Basinghall Avenue, London, EC2V 5DD Standard Chartered Bank is authorised by the Prudential

Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

United Kingdom: Standard Chartered Bank (trading as Standard Chartered Private Bank) is an authorised financial services provider (licence

number 45747) in terms of the South African Financial Advisory and Intermediary Services Act, 2002

In Dubai International Financial Centre (“DIFC”), the attached material is circulated by Standard Chartered Bank DIFC on behalf of the product

and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authority (DFSA) and is authorised to provide financial

products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules. The protection and compensation

rights that may generally be available to retail customers in the DIFC or other jurisdictions will not be afforded to Professional Clients in the DIFC.

Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively “SCB”)

according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, this document is distributed in such

jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction should contact the local SCB entity in relation to any

matters arising from, or in connection with, this document. Not all products and services are provided by all SCB entities.

This document is being distributed for general information only and it does not constitute an offer, recommendation or solicitation to enter into any

transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This document is for

general evaluation only, it does not take into account the specific investment objectives, financial situation or particular needs of any particular

person or class of persons and it has not been prepared for any particular person or class of persons.

Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Past performance is

not indicative of future results and no representation or warranty is made regarding future performance. Any forecast contained herein as to likely

future movements in rates or prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future

movements in rates or prices or actual future events or occurrences (as the case may be).

This document has not and will not be registered as a prospectus in any jurisdiction and it is not authorised by any regulatory authority under any

regulations.


21

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