Daily Market Outlook, July 21, 2023

Munnelly’s Market Commentary…

Asian equity markets were a mixed bad overnight following the negative sentiment from Wall Street, particularly from the Nasdaq 100, which had its second-worst day of the year due to tech earnings disappointment and rising yields, weighing on investor sentiment.The Nikkei 225 also started the day with a slump but recovered slightly as participants digested somewhat ambiguous CPI data. The data mostly met expectations but showed a slight acceleration in both headline and core inflation. Meanwhile, the Hang Seng rose modestly and the Shanghai Composite remained flat. These indices were supported by further efforts from China to boost the economy. The NDRC released policies aimed at stimulating electronics products consumption and promoting automobile consumption, helping to maintain positive sentiment in the region.

Next week will be significant for central bank meetings, with the U.S. Federal Reserve, European Central Bank (ECB), and Bank of Japan (BoJ) all scheduled to meet. Investors will closely watch the outcomes of these meetings, especially in the context of potential policy tweaks. There is speculation that the BoJ may make imminent policy adjustments during its meeting. Inflation in Japan remained above the central bank's target of 2% for the 15th consecutive month in June. However, the inflation gains matched a median market forecast, suggesting that the central bank's efforts to achieve sustained inflation may still face challenges. As central banks play a crucial role in shaping economic policies and financial markets, the outcomes of these meetings are expected to have an impact on global investor sentiment and market dynamics.

CFTC Data As Of 14-07-23

USD net spec short fell a touch in the Jul 5-11 period as $IDX slid 1.37%
Fairly serious moves among majors w/hardly any position changes
Suggest a fair amount of position replacement as specs were getting stopped
EUR$ +1.2% in period, specs -2,675 contracts into strength now +140,162
$JPY -2.84% in period after breaching 145 last wk, specs buy 738 contracts
GBP$ +1.73% as BoE seen a cointoss for +50bp Aug 3, specs +7,798 now +58,063
CHF specs relatively active -4,503 contracts now short 7,907
$CAD +0.06%, Aussie -0.06% specs sell less than 1k contracts
BTC fell a scant 0.74%, specs +221 on dip now short 1,855 contracts(Source: Reuters)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.1100 (581M), 1.1150 (525M), 1.1175-80 (354M), 1.1200-05 (627M)
USD/CHF: 0.8625 (200M), 0.8715 (300M). GBP/USD: 1.2970 (277M)
EUR/GBP: 0.8600 (651M), 0.8640 (200M), 0.8695-0.8700 (551M)
AUD/USD: 0.6700 (862M). AUD/NZD: 1.0900 (1BLN)
USD/CAD: 1.3145-55 (1.1BLN)
USD/JPY: 140.00 (608M), 140.50 (439M). EUR/JPY: 154.00 (300M)

Options Market Positioning

The demand for U.S. dollar put options has weakened, and foreign exchange (FX) implied volatility has reached its peak for the time being as the dollar experiences a mild recovery. However, the options market is anticipating increased FX volatility around the July 26 Federal Open Market Committee (FOMC) policy decision. Even though markets are pricing in a final 25bps interest rate hike in the current cycle, related implied volatility gains are not ruling out the possibility of heightened FX volatility. For EUR/USD, the 1.13 barriers seem secure as demand for topside strike options decreases, and premiums for EUR put/USD call options show some recovery. In USD/JPY, there is interest in a large 140.00 strike before Thursday's 10 am New York cut, but further gains may be challenging until after Friday's Japanese CPI release. The one-week expiry will also include the Bank of Japan's (BoJ) policy announcement on July 28. Unless there is a significant CPI beat, any implied volatility gains related to the BoJ's dovish rhetoric might be seen as opportunities to sell.

Overnight Newswire Updates of Note