Daily Market Outlook, July 27, 2023

Munnelly’s Market Commentary…

After the Federal Reserve's widely expected 25bps rate hike and Chairman Jerome Powell's remarks about keeping the door open for a potential further increase, Asian equity markets traded higher. The Nikkei 225 initially hesitated due to a firmer currency and the Bank of Japan's ongoing policy meeting but eventually joined the rally. The Hang Seng and Shanghai Composite were positive, with Hong Kong outperforming despite the HKMA's lockstep rate, supported by recent efforts and positive sentiment in the tech and auto industries. China issued guidelines on intelligent connected vehicles, and regulators held talks with major ride-hailing firms, driving further market enthusiasm. Additionally, XPeng shares surged over 30% after Volkswagen took a 5% stake in the company and announced plans for joint electric model development.

Now, attention turns to the European Central Bank (ECB) meeting today and the Bank of Japan's policy update early tomorrow. The ECB is expected to raise interest rates by 25bps, bringing them up by a total of 425bps since its tightening campaign began a year ago, with markets pricing in about a 95% probability of the hike. However, there is growing uncertainty about the ECB's future actions due to concerns about a decline in the growth outlook and recent frailty in business surveys in the Eurozone. Though headline inflation has reduced to 5.5%, core inflation remains stickier. The ECB may keep its options open for September, reiterating that it is data-dependent and refraining from giving a clear indication. Like the Fed, the ECB will have several months of data to consider before the September update, including inflation data and Q2 GDP.

Regarding the Bank of Japan, there has been market conjecture about a potential modification of its ultra-loose monetary policy due to the recent rise in Japanese inflation. However, BoJ Governor Ueda downplayed the likelihood of an early change, indicating that more evidence of sustained inflation rise is needed. While policy is expected to remain unchanged for now, the odds of a policy adjustment later in the year seem to be increasing.

Stateside, on the data front, the US Q2 GDP is expected to post an annualised quarterly rise of 2.0%, the same as Q1. While the detail may show inventory growth contributing more to the rise and final demand less, it is unlikely to hint at an impending recession.

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: 1.1025 (1.4BLN), 1.1100 (2.4BLN), 1.1105-15 (2.1BLN)
1.1150 (1BLN), 1.1180-85 (875M), 1.1250 (1.2BLN)
USD/CHF: 0.8535 (230M), 0.8675 (540M), 0.8790-0.8805 (662M)
EUR/GBP: 0.8550 (218M), 0.8600 (305M), 0.8650 (1BLN)
USD/CAD: 1.3150 (415M)
AUD/USD: 0.6730 (834M), 0.6750 (475M), 0.6800 (320M)
0.6825 (562M), 0.6840 (542M)
NZD/USD: 0.6035 (880M), 0.6100 (360M), 0.6135 (508M)
USD/JPY: 139.50 (700M), 140.00 (1BLN), 140.50 (357M), 141.00 (1BLN)

Options Market Positioning

There are 4.5-billion euros in option strikes between 1.1100 and 1.1115 expiring after the European Central Bank (ECB) meeting, along with 4-billion euros in strikes between 1.1050 and 1.1100 expiring on Friday. The accumulation of these large options positions contributes to the market's current condition. However, the reaction of option premiums might be influenced by the ECB's actions and statements on Thursday. If the ECB fails to generate excitement or provides unexpected signals, it could lead to a further fall in option premiums. Bank of Japan (BoJ) policy announcement, now factored into the overnight foreign exchange (FX) option expiry, has resulted in a notable increase in implied volatility. The overnight expiry USD/JPY implied volatility is currently quoted at around 39.0, significantly higher than the previous level of 14.0. This indicates a substantial surge in the market's anticipation of potential price fluctuations for USD/JPY in the immediate future. As a result of the increased implied volatility, the premium or break-even point for USD/JPY options has widened to 228-JPY pips from the previous 82-JPY pips, reflecting the market's higher demand for protection against possible adverse price movements.