Daily Market Outlook, July 12, 2023

Munnelly’s Market Commentary…

Asian equity markets exhibited a mixed performance as investors maintained caution ahead of the release of key US inflation data. The Nikkei 225 in Japan declined below the 32K handle. This underperformance was influenced by a stronger Japanese yen, as the USD/JPY currency pair retreated below 140.00. Additionally, disappointing Machinery Orders data also contributed to the negative sentiment. The Hang Seng Index in Hong Kong increased by 1.2%, benefiting from strength in the technology sector. However, the Shanghai Composite Index experienced a slight decline of 0.1%. Despite stronger-than-expected loans and aggregate financing data from China, the mainland market remained cautious due to upcoming key events and uncertainties.Investors in the region were particularly cautious ahead of the release of US inflation data, which is considered a key risk event. Inflation data can significantly impact market sentiment and influence central bank decisions regarding monetary policy.

UK investors will focus on Bank of England Governor Bailey who will hold a press conference to discuss the recently released Financial Stability Report. Market participants will be particularly interested in any comments regarding the interest rate outlook, especially in light of the recent acceleration in wage growth reported in the employment market statistics. There will also be a focus on any new information regarding the impact of interest rate increases. The report highlights the changing dynamics of the mortgage market and warns of a sharp rise in mortgage repayments. However, it also states that banks are well-positioned to support their customers.

In Canada, the Bank of Canada will provide an update on monetary policy. In June, the central bank raised rates for the first time since January, ending a two-meeting pause. Market expectations are for another 25 basis point hike, and investors will be watching for any indications regarding the timing of a potential second pause.

Stateside, oday's US Consumer Price Index (CPI) report for June is expected to show a further decline in annual headline inflation. The forecast suggests a sharp slowdown to 3.1% from 4.0% in May. This drop is anticipated and is primarily attributed to the comparison with energy prices from the previous year. Core inflation, which excludes volatile food and energy prices, is projected to have decreased more modestly to 5.1% from 5.3%. The relative stability of core inflation could be a concern for Federal Reserve policymakers, particularly considering the tight labour market. It will be interesting to observe any reactions from Fed officials ahead of this weekend's blackout period for Fed commentary, although indications suggest that the data will not derail their intention to raise rates at the July meeting. Several speakers scheduled to address various topics following the release of the US inflation data. Fed's Barkin (2024 voter) is expected to address the topic of inflation. Given the release of the CPI data, Barkin will likely provide insights into the current inflationary environment and its implications for monetary policy. Kashkari (2023 voter) will address banking solvency and monetary policy, Bostic (2024 voter) will provide commentary on financial payments while Mester(2024 voter) is slated to speak at a FedNow event.

CFTC Data As Of 07-07-23

USD net spec short pared in Jun 28-Jul 3 period, $IDX +0.58% in period
EUR$ -0.77% in period, specs -2,191 contracts into dip, now +142,837
$JPY +0.3% in period, specs -5,050 contracts on diverging rates now -117,920
GBP$ -0.29%, specs -1,729 contracts, now +50,265; less-dovish Fed lifts USD
$CAD +0.21% specs +7,374 contracts flip position to +4,527
AUD$ +0.09% in period, specs -5,158 contracts now -44,582
BTC +0.5% in period specs +18 contracts now short 2,076 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 (698M), 1.0950 (776M), 1.0985-1.1000 (1.6BLN)
USD/CHF: 0.8855 (290M), 0.8900 (465M)
GBP/USD: 1.2865 (294M). EUR/GBP: 0.8600 (302M)
AUD/USD: 0.6675 (305M), 0.6780 (294M)
NZD/USD: 0.6200 (251M), 0.6240-45 (396M)
USD/JPY: 141.00 (466M). EUR/JPY: 156.00 (890M)

Implied volatility remains well supported, particularly in high beta currencies such as the Japanese yen (JPY) and the Australian dollar (AUD). High beta currencies tend to exhibit larger price swings compared to other currencies, reflecting their sensitivity to market factors.