Daily Market Outlook, August 9, 2023

Munnelly’s Market Commentary…

Asian equity markets are predominantly trading lower against the backdrop of a flurry of earnings releases. Participants are also processing the latest inflation data from China, which presented a mixed picture by indicating consumer prices in deflationary territory for the first time in over two years.

The Nikkei 225 index is experiencing uncertain trading as a result of an influx of corporate earnings releases. The index's most significant gainers and losers are influenced by corporate performance, including SoftBank, which finds itself closer to the bottom of the spectrum following an unexpected loss. Both the Hang Seng index and the Shanghai Composite index are subdued, with the markets reflecting on China's conflicting inflation data. The data revealed that the Consumer Price Index (CPI) year-on-year slipped into deflation territory. However, the drop in prices was narrower than anticipated, and monthly consumer prices unexpectedly increased. On the other hand, China's factory gate prices continued to decline at a more pronounced pace than forecast.

The remainder of the day's data docket lacks noteworthy economic releases in the UK, US, or the Eurozone, and is devoid of any planned addresses from economic policymakers as the summer lull in activity takes hold.

Therefore, while the calendar for today seems light, the market's focus will turn to tomorrow's release of US CPI inflation data. This marks the first of two US inflation reports to be disclosed prior to the next US monetary policy announcement, which holds paramount importance in determining the possibility of a Fed interest rate hike. Following closely, on Friday, there will be a consequential release of UK GDP data. Looking further ahead into the next week, an eventful calendar includes UK reports on inflation and the labour market, both of which will significantly influence the BoE's forthcoming rate decision.

CFTC Data As Of 25-07-23

USD spec net short pared in Jul 26-Jun 1 period, $IDX -0.72%
EUR$ -0.58% in period specs -5,168 contracts, now short 172,062
$JPY +1.75% in period, specs -1,464 contracts into strength now -79,216
GBP$ -0.95% in period, specs -9,433 contracts, specs sell into dip
AUD$ -2.61% in period spec -591; $CAD +0.82% specs +835- just noise
BTC -0.05% in period, specs +106 contracts now -539
Prevailing theme was more-dovish c.bank guidance, USD firm amid high-for-longer vibe (Source: Reuters)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.0890-1.0905 (2.3BL), 1.0930-40 (577M), 1.0980 (673M), 1.10 (251M)
GBP/USD: 1.2600 (683M), 1.2650 (355M), 1.2800 (200M), 1.2825 (277M)
AUD/USD: 0.6500 (426M), 0.6620 (300M), 0.6640 (566M)
NZD/USD: 0.6215 (339M).
EUR/NOK: 11.20 (280M), 11.25 (248M), 11.40 (1.1BLN)
USD/JPY: 142.00 (1.5BLN), 142.35-45 (1BLN), 142.75 (1.8BLN), 143.00 (2.2BLN)
143.25 (325M), 144.50 (730M).
USD/CAD: 1.3385 (655M)

FX Options Positioning

FX option implied volatility experienced a decrease due to anticipated reduced volatility in August, aligning with historical patterns. However, the USD saw a slight increase in value as the market approached Thursday's release of US Consumer Price Index (CPI) data, which prevented more significant drops for the time being. Traders displayed a tendency to purchase declines in AUD/USD implied volatility. This suggests that concerns are present regarding potential further declines in the currency pair towards the 2023 lows situated at 0.6459. These concerns emerged after the 0.6500 barrier options were erased on Tuesday. The EUR/USD currency pair finds itself confined within a range of 1.0900 to 1.1050, characterised by a region of long gamma. This situation serves to limit the movement of the spot rate while also influencing implied volatility. Despite testing the lower boundary of this range, the 1-month implied volatility has managed to hold its ground above the level of 6.5 for the time being.