Daily Market Outlook, March 19, 2024

Munnelly’s Macro Minute…

“BoJ Makes Their Move, JPY Buy The Rumour Sell The Fact”

Despite positive cues from Wall Street overnight, Asian stock markets are predominantly lower on Tuesday as traders adopt a cautious stance after monetary policy announcements from the Reserve Bank of Australia and the Bank of Japan. Additionally, anticipation surrounds the US Fed's monetary policy announcement on Wednesday, with investors keen for insights into the outlook for interest rates. Although Asian markets closed mostly higher on Monday, ongoing uncertainty prevails in the current session. The Fed is widely anticipated to maintain interest rates unchanged following recent inflation readings that have tempered optimism regarding a rate cut in June. However, market attention will be directed towards the central bank's accompanying statements and economic projections, which hold the potential to significantly influence rate expectations. Looking ahead, the Bank of England and the Swiss National Bank are also scheduled to announce their monetary policy decisions later in the week, adding to the market's anticipation and volatility.

The Bank of Japan (BoJ) has increased its interest rates for the first time in almost 20 years, making it the last central bank in the world to end negative rates as indications of strengthening inflation emerge. The BoJ Policy Board, led by Governor Kazuo Ueda, voted 7-2 to raise the overnight interest rate from around -0.1 percent to 0 to 0.1 percent. The central bank also decided to terminate its yield curve control policy, which had kept the interest on 10-year Japanese government bonds around zero. Market expectations were high for the BoJ to discontinue its unconventional and extremely loose policy measures implemented in 2016 to combat persistent deflation. This marks the first rate hike since 2007, following recent data showing an increase in inflation. In recent weeks, several BoJ rate-setters have indicated that the 2 percent inflation target is within reach.

Today's German ZEW survey for March marks the beginning of several Eurozone data releases for the month, with the PMI and IFO surveys scheduled for Thursday and Friday, respectively. Unlike the PMI and IFO surveys, the ZEW survey polls analysts rather than companies. The previous reading for February indicated that the current conditions component was at its lowest level since 2020, during the height of Covid concerns. However, the forward-looking expectations part of the survey has seen seven consecutive months of growth, suggesting that analysts anticipate better times ahead. Similar outcomes are expected for March.

Stateside, there are indications of improvement in the housing market. For instance, yesterday's NAHB housing market index for March reached an eight-month high. Although housing starts experienced a nearly 15% decline in January, this could be attributed to adverse weather conditions rather than economic factors such as the recent rise in mortgage rates. Prior to this decline, housing starts had increased for four consecutive months. Additionally, new building permits, which are less susceptible to weather impacts, held up better in January. Therefore, it will be intriguing to observe the extent to which housing starts rebounded in February.

Overnight Newswire Updates of Note

Japan Raises Interest Rates For The First Time In 17 Years
RBA Holds Rates, Drops Explicit Warning Over Further Rises
Japan FinMin Suzuki: Strong Wage Growth Drives Positive Economic Momentum
RBA’s Bullock: Need More Confidence On Inflation Lowering To Consider Cut
Deal Reached To Avoid Shutdown, Negotiators Resolve Homeland Security Bill
Jump In UK Minimum Wage Keeps Bank Of England On Alert
BoJ’s Dovish Tone After First Rate Hike Since 2007 Weighs On Yen
Oil Holds Gain With Russian Refining And OPEC+ Curbs To The Fore
BoJ Rate Hike Unlikely To Derail Stock Rally, Strategists Say
Nvidia Joins Ongoing Race In Quantum-Computing Cloud Services
Israel And Hamas Start Detailed Hostage Negotiations For First Time In Months

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.0800 (EU760.6m), 1.0790 (EU680.3m), 1.1100
USD/JPY: 150.00 ($732.8m), 151.50 ($500m), 143.30 ($500m)
AUD/USD: 0.6275 (AUD545m), 0.6800 (AUD412.7m), 0.6575 (AUD371.6m)
USD/CNY: 7.1750 ($336.9m), 7.2100 ($332.9m), 7.2260 ($300m)
USD/CAD: 1.3100 ($602m), 1.3545 ($341.1m)
GBP/USD: 1.2500 (GBP430.4m)
NZD/USD: 0.5900 (NZD335m)
Warnings about USD/JPY gamma positioning have surfaced, indicating potential market dynamics. Following the BoJ announcement, the USD/JPY reaction was subdued, as the outcome had been extensively anticipated. Post-event, there's a marginal decrease in implied volatility and option premiums. Reports suggest the market is holding a long gamma position (short-dated expiry options) below 151.00. However, this gamma positioning is expected to shift to a short gamma position above 151.00, with a notable increase in short gamma positioning above 152.00 and particularly significant levels above 153.00.Short gamma positioning tends to heighten volatility and could drive FX spot rates higher. Given this scenario, USD/JPY bulls may perceive current FX option prices as favorable, especially considering the potential for increased volatility in the market.

CFTC Data As Of 15/03/24

Bitcoin net short position is -994 contracts
Euro net long position is 74,407 contracts
Japanese Yen net short position is -102,322 contracts
Swiss Franc posts net short position of -17,870
British Pound net long position is 70,451 contracts
Equity fund managers cut S&P 500 CME net long position by 3.983 contracts to 913,990
Equity fund speculators increase S&P 500 CME net short position by 71,149 contracts to 474,044