Daily Market Outlook, July 26, 2023

Munnelly’s Market Commentary…

Asian equity markets traded in a mixed fashion overnight with a lack of clear direction as major central bank policy decisions are approaching. The US Federal Reserve (FOMC) is expected to make an announcement today, followed by the European Central Bank and the Bank of Japan later in the week. In Japan, the Nikkei 225 index swung between gains and losses, affected by softer Services PPI data and uncertainty ahead of the Bank of Japan meeting. In China, the Hang Seng and Shanghai Composite indices were weaker after a previous stimulus boost lost momentum. However, expectations for further support measures and increased liquidity efforts from the People's Bank of China (PBoC) limited the downside.

The Federal Reserve is widely anticipated to raise interest rates by 25bps, with more than a 95% probability assigned by markets. The majority of Fed policymakers have been indicating support for at least one further rate hike in the autumn. However, recent market scepticism, triggered by lower-than-expected US inflation in June, raises the question of whether today's expected hike will be the last one or if there will be more. Given the unusually long gap until the next policy update in September, Fed policymakers might be inclined to keep their options open and state that further rate moves will depend on economic data.

The data docket for the day is light, with Eurozone money supply data and US June new home sales data being of interest. The Bank of Canada will also release the minutes of its last policy meeting when it raised rates. Overall, market participants are eagerly awaiting guidance from the central banks on their future policy actions, and any statements made during the announcements could have significant impacts on financial markets

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: 1.1000 (1BLN), 1.1025 (1.5BLN), 1.1060 (302M), 1.1070-75 (2.3BLN)
1.1085-1.1100 (1.1BLN).
GBP/USD: 1.2800 (205M), 1.2875-80 (291M), 1.3035 (223M)
AUD/USD: 0.6725 (488M), 0.6800 (329M), 0.6900 (718M)
EUR/AUD: 1.6350 (448M), 1.6400 (448M)
USD/JPY: 140.00 (885M), 141.00 (416M), 142.00 (1.3BLN)

Options Market Positioning

The current implied volatility premium for JPY calls is near a one-year high, last seen before a Bank of Japan event in March. USD/JPY, the 1-week implied volatility is sitting 4.0 points above the levels observed before the Bank of Japan announcement. But what truly reflects the perceived risk from the BoJ is the continuously increasing premium for JPY call options compared to put options through 1-week expiry risk reversals. These JPY call options are being seen as a hedge against any potential policy changes that might impact USD/JPY. EUR/USD has been facing ongoing pressure, but the decline has been slowed by long gamma positioning, which indicates that market participants are adjusting their options exposure to limit potential losses in case of sharp price movements. In the case of GBP/USD, the implied volatility for the benchmark 1-month expiry FX options remains elevated in the mid-8s compared to the mid-7s in early July. Traders appear to be more interested in covering two-way volatility, rather than taking any specific directional bias, as uncertainty looms.