Daily Market Outlook, August 2, 2023

Munnelly’s Market Commentary…

Asian equity markets are trading lower, following a negative lead from Wall Street. The sentiment has been dampened by higher yields and weak economic data. One of the factors affecting the market is Fitch's credit rating downgrade for the United States from AAA to AA+.

The Nikkei 225 index is down 2.3% and has fallen below the 33K handle. The focus has shifted to corporate earnings despite comments from the Bank of Japan's Deputy Governor Uchida, who maintained a dovish tone and emphasised that last week's decision was a pre-emptive step to continue monetary easing without disruptions. The Hong Kong market is down 2.1%, following the overall risk aversion sentiment. The mainland Chinese market is down 0.8%, initially cushioned by policy support and jawboning from agencies like the People's Bank of China (PBoC). The PBoC has pledged to support the stable and healthy development of the real estate market, maintain reasonable liquidity, and promote a steady decline in financing costs for enterprises and interest rates for residents.

In terms of the economic data docket for the rest of the day, there are no official data releases scheduled for the UK, Eurozone, or the US. This lack of economic data may lead to market speculation about the outcome of Thursday's Bank of England monetary policy update. Current market pricing indicates a high probability of another interest rate hike, with a 25-basis point increase seen as more likely than a second consecutive 50-basis point rise. A Bloomberg survey of 56 economists showed that 41 of them expect a 25-basis point hike.

Stateside, the July ADP survey of private sector employment is being closely watched as an indication of the likely outcome of the official employment data due on Friday. The forecast for the ADP measure is a 190k rise in private sector employment. However, it's worth noting that despite a revamp, the ADP measure has not proved to be a reliable preview of the official payrolls series in recent months. Last month, it over-predicted payrolls by almost 350k, although prior to that, it had been an under-predictor more generally.

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: 1.0975-80 (877M), 1.0990 (817M), 1.1000 (301M)
1.1050 (411M), 1.1065 (553M). Huge strikes Thursday
USD/CHF: 0.8550 (600M), 0.8750 (265M)
AUD/USD: 0.6660 (630M), 0.0.6675-85 (1.1BLN), 0.6700 (535M)
NZD/USD: 0.6330 (1BLN). USD/CAD: 1.3150-65 (520M), 1.3270 (400M)
USD/JPY: 142.00 (352M), 142.40-50 (638M), 143.00 (670M)

Options Market Positioning

Options analysis suggests that the GBP/USD pair is susceptible to further gains in the USD and may face challenges from an underwhelming rate hike decision by the Bank of England on Thursday. However, the lack of premium or demand for downside versus upside strike options indicates that there might not be strong hedging activity or significant bets on downside moves.

On the other hand, the AUD/USD pair is experiencing volatility premiums supported by a setback in the spot price after the Reserve Bank of Australia (RBA) meeting. This setback puts key support at 0.6595 at risk, meaning that the Australian dollar may face further downward pressure against the US dollar.

In summary, the outlook for GBP/USD leans towards potential USD gains and a potentially underwhelming rate hike from the Bank of England, while AUD/USD is facing volatility premiums due to a post-RBA spot setback. Both currency pairs are influenced by their respective central bank actions and broader market sentiment.