Daily Market Outlook, August 1, 2023

Munnelly’s Market Commentary…

Asian equity markets showed a mostly positive trend, taking cues from Wall Street's S&P 500, which marked its 5th consecutive monthly gain. However, market participants were also digesting disappointing Chinese Caixin Manufacturing PMI data and the Reserve Bank of Australia's (RBA) decision to keep rates unchanged.

The Nikkei 225 gained 0.7%, supported by a weaker currency and positive earnings releases in Japan. A recent Bloomberg poll revealed that BoJ watchers do not expect any further policy shifts from the central bank this year, with April now considered the likely timing for any potential changes. The Hang Seng rose by 1.2%, and the Shanghai Composite increased by 0.1%, shrugging off the disappointing Chinese Caixin Manufacturing PMI data, which slipped into contraction territory for the first time in three months. Hong Kong's tech sector strength lifted the Hang Seng, while further support efforts from China helped buoy the mainland market.

The rest of the day's economic calendar is dominated by July manufacturing PMI updates. The Eurozone and the UK are expected to have second readings that are unlikely to be revised from the initial estimates. Both regions experienced declines in manufacturing activity, with the Eurozone's output index reaching a 38 month low and the UK's hitting a seven month low. However, there are positive signs of easing inflationary pressures in the sector.

Stateside, the first reading for the July PMI manufacturing index improved to a three month high, although it still remains below the 50 expansion level. There are signs that government incentives for 'green' industries are helping to boost demand for capital goods, offering hope that the sector's activity may be bottoming out. Nevertheless, the ISM manufacturing index for July is still expected to be below the expansion level of 50. Other data points for the US economy include construction spending, which has been impacted by higher rates but is showing tentative signs of improvement, and the job market turnover report from July. This data will provide insight into labour market conditions, with the key report on this topic being Friday's payrolls report for July.

CFTC Data As Of 25-07-23

USD net spec short grew in Jul 19-25 period, $IDX +1.34% in period
Rates remain key driver, after period close Fed, ECB lilted dovish
BoJ adjusted YCC JGB 10-yr intervention lvl to 1%, yen whipsawed
EUR$ -1.52% in period, specs -1,602 contracts now -177,230
$JPY +1.34% in period, specs +12,487 into strength now -77,752
GBP$ -1%, specs -4,734 contracts, now +58,995; after below f/c CPI
AUD$ -0.3% in period, specs -800 contracts; $CAD +0.03%, specs +5,009
BTC -1.86% in period specs +516 contract by trend lows now -645 contracts(Source: Reuters)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.0900-05 (363M), 1.1000-10 (1.1BLN), 1.1030-40 (2.5BLN)
1.1045-55 (2.9BLN), 1.1100 (2BLN)
GBP/USD: 1.2850 (255M), 1.2855 (364M), 0.2865 (230M), 1.2900 (366M)
EUR/GBP: 0.8660 (490M), 0.8710 (339M)
AUD/USD: 0.6620-30 (850M). USD/CAD: 1.3285-1.3300 (818M)
USD/JPY: 142.00 (1.7BLN), 142.50 (710M), 143.00 (361M), 143.25 (400M)

Options Market Positioning

The implied volatility premiums for USD/JPY are notably lower for downside strikes compared to upside strikes. Additionally, trade flows are indicating a focus on pushing the USD/JPY pair towards 145.00, suggesting a potential downward movement in the exchange rate.

For EUR/USD, implied volatility is declining, but there is considerable interest in owning downside strikes, which is leading to a volatility premium for EUR puts over calls on the -1-month expiry risk reversals, currently standing at 0.25. This indicates that there is a preference for hedging against potential downside risks for the EUR/USD pair in the short term.