Daily Market Outlook, July 28, 2023

Munnelly’s Market Commentary…

Asian equity markets traded mixed as investors were cautious and focused on the Bank of Japan's (BoJ) policy decision. The central bank kept monetary policy settings unchanged but announced a more flexible approach to yield curve control (YCC), with fixed rate operations for 10-year Japanese Government Bonds (JGB) to be conducted at 1.0%, an increase from the previous 0.50%. This move spooked markets, causing the Nikkei 225 to underperform, falling 1.7%. In contrast, the Hang Seng and Shanghai Composite recovered from early weakness and gained as China's efforts to support the housing market and tech industry boosted sentiment.

Looking ahead, there are no major data releases on the docket in the UK today. However, next week's focus will be on the Bank of England's policy decision, with expectations of at least a 25bps interest rate increase to 5.25%, and a considerable chance of a 50bp increase to 5.5%.

For the Eurozone, France reported firmer-than-predicted Q2 GDP growth of 0.5%, showing a rebound from the previous quarter. Spain also reported a rise of 0.4% for Q2. While these figures indicate a return to growth in the Eurozone, business surveys suggest weakening demand and pose downside risks for the second half of the year. Additionally, France's preliminary July CPI inflation fell to 5.0%, the lowest since February 2022, while Germany's July inflation data is still pending.

Stateside, several important data releases are expected. June personal spending is predicted to increase by 0.5%, and the PCE deflator, the Federal Reserve's preferred inflation measure, is expected to fall to 3.1% from 3.8% in May, with the core measure declining to 4.2% from 4.6%. The Q2 employment cost index will also be closely watched by the Fed as a gauge of wage pressures, with an expected rise of 1.2%q/q, matching the Q1 result. A weaker figure could increase the odds of the Fed holding rates in September.

CFTC Data As Of 18-07-23

USD net spec short grew in the Jul 12-18 period amid a $IDX 1.65% slide
EUR$ +2% in period, specs +38,670 into strength, now long 178,832 contracts
$JPY -1.05%, specs +26,943 contracts, short reduced to -90,239
GBP$ +0.77%, specs +5,666 contracts now +63,729; data pre-UK CPI Wednesday
AUD$ +1.88%, specs -5,317 now -50,401 contracts; $CAD -0.46% specs -3,923
BTC -2.6% in period specs buy 694 contracts on dip, now -1,161 contracts
Note since Tuesday reporting period close the $IDX is down near 0.9%
EUR$ has dipped 0.88%, $JPY rose 2.11% after period closed leaving recent EUR & JPY buyers in the red(Source: Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0900 (433M), 1.0970-80 (500M), 1.1000 (1.7BLN)
1.1020 (406M), 1.1050 (3BLN)
EUR/GBP: 0.8575 (424M). USD/CHF: 0.8650-55 (316M), 0.8675 (431M)
AUD/USD: 0.6750 (258M). USD/CAD: 1.3250 (578M), 1.3280 (1BLN)
USD/JPY: 138.00 (465M), 140.00 (322M), 140.25 (1.3BLN), 140.65 (678M)

Options Market Positioning

The overnight break-evens for EUR/USD options were perceived as costly, considering the market's expectation that the European Central Bank (ECB) would follow the Federal Reserve's path and adopt a more hawkish stance. However, those who held EUR/USD options and those who had sold EUR/USD in the cash market, as anticipated by market participants, were rewarded. The ECB's dovish shift, combined with strong economic data from the United States, led to a decline in the EUR/USD pair from 1.1150 to 1.1000. Looking ahead, month-end FX rebalancing flows are projected to be mildly USD bearish, which means they could weaken the US dollar, and simultaneously be supportive of the Euro (EUR). This could add further pressure on the USD and lend support to the EUR in the currency market.