Daily Market Outlook, October 13, 2023

Munnelly’s Market Commentary…

Asian equity markets faced headwinds from Wall Street, where headline CPI data exceeded expectations. The region also contended with softer-than-expected inflation and mixed trade data from China. The Nikkei 225 traded negatively, choppy price action initially stemmed the downside. Japan announced plans to release an economic security plan to safeguard vital industries such as semiconductors. The Hang Seng and Shanghai Composite were down, with technology companies in Hong Kong particularly affected by broker downgrades. Additionally, the US was reported to be considering closing a loophole that grants Chinese companies access to American AI chips via overseas units. Chinese inflation data underwhelmed, with consumer inflation flat and factory gate prices in deeper-than-forecast decline. Mixed Chinese trade data showed exports surpassing expectations but remaining in contractionary territory.

Eurozone industrial production data for Q3 will likely offer tangible evidence of modest activity. National releases suggested a 0.4% increase in August, exceeding consensus forecasts. Nonetheless, sector output appeared likely to contract for a fourth consecutive quarter in Q3, reinforcing expectations of a potential peak in ECB rates.

In the UK, investor attention will be on appearances by BoE Governor Bailey and Deputy Governor Cunliffe at an IIF conference in Marrakech. Bailey's casting vote at the last policy meeting kept interest rates at 5.25%. Deputy Governor Cunliffe voted for a hike in September, citing persistent inflationary pressures, though that was his last MPC meeting as he was set to leave the committee at the end of the month.

Central bank speakers include ECB President Lagarde, participating in an IMF seminar debate on the global economy, and the Fed's Harker, scheduled to speak on the economic outlook. Recent Fed comments suggested that many policymakers believed the bond market sell-off reduced the need for another rate hike.

Stateside,The University of Michigan survey's preliminary consumer sentiment data for October in the US is the notable release. Expectations point to a third consecutive monthly drop, from 68.1 in September to 67.5. Attention will also be focused on the survey's inflation expectations gauge, particularly the longer-term measure after it fell to 2.8% last month.

FX Positioning & Sentiment

Recent option trading in USD/JPY provides insights into the short-term outlook. Short-dated expiry FX options thrive on volatility and rapid directional moves, making implied volatility an essential measure to set premiums. Short-dated expiry implied volatility is currently at long-term lows due to consistent sales. Notably, options expiring on Monday have been sold with a 4.5 premium, where the break-even point is just 50 JPY pips. Similarly, one-week options were sold with a 6.75 premium, requiring a move of 111 JPY pips to break even (for vanilla straddles). In contrast, one-month expiry options reached an 8.5 low, down from a high of 10.2 last week. These trade flows suggest a lack of realised volatility expectations in the near term. While USD strength supports the pair, the risk of BoJ intervention could slow or limit further gains. The recent resurgence of the USD hasn't triggered panic in the FX options market. Throughout the week, FX option implied volatility remained subdued. The diminishing risk aversion and the FX market's preference for sticking to familiar trading ranges led to a trend of selling options. However, despite these losses, there hasn't been a rush to close out short positions or reestablish long positions. Even as the USD has shown signs of recovery, it has stayed within its established trading ranges and has not surged beyond recent highs, at least for the time being.

CFTC Data As Of 3-10-23

EUR net spec long falls to 78,943 in week to Tues from 98,399
Smallest EUR long since October
JPY short increases to 113,988 contracts from 109,512
AUD short 81,987 versus 86,815 previous week
GBP flips to short 6,680 from long of 15,669
First sterling short since April
CHF short jumps to 16,742 -- biggest since November -- from 9,115. (Source Reuters)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.0470-75 (4.7BLN), 1.0500 (1.3BLN), 1.0515-20 (4BLN)
1.0550 (1BLN), 1.0565-75 (2.9BLN), 1.0600 (520M), 1.0625-35 (4.3BLN)
USD/CHF: 0.9030 (500M), 0.9075 (477M), 0.9090 (304M)
USD/NOK: 10.95 (482M).
EUR/NOK: 11.4340 (451M)
GBP/USD: 1.2145-50 (601M), 1.2200 (635M), 1.2245-55 (722M)
EUR/GBP: 0.8700 (450M).
EUR/JPY: 158.25 (818M)
AUD/USD: 0.6290-0.6300 (671M), 0.6425-35 (569M)
USD/JPY: 149.00-10 (1.1BLN), 149.50 (819M), 149.75 (604M), 150.00 (851M)

Overnight Newswire Updates of Note

Fed Collins highlights the significance of CPI data in revealing uneven progress toward price stability.
Collins acknowledges that a strong economy allows for the extension of high-interest rates.
Fed Chair Powell is scheduled to speak on October 19 before the blackout period.
Housing remains a puzzle in the Fed's ongoing battle against inflation.
Fed custody holdings increased by $896 million to reach $3.425 trillion during the week ending October 11.
US Treasuries also saw a rise of $1.405 billion to $2.993 trillion, while agencies increased by $9 million to $349.586 billion.
US House speaker nominee Scalise withdraws from the race, adding to the political turmoil.
G7 reaffirms concerns about excessive foreign exchange (FX) volatility, as stated by a Japanese official.
Japanese households' inflation expectations saw a slight rise according to a BOJ poll.
China is considering a new stabilisation fund to support the stock market, according to Bloomberg News.
China's FX regulator suggests that central bank digital currency (CBDC) features could enhance monetary policy.
The narrowing trade slump in China boosts recovery prospects but still presents challenges.
Israel informs the UN that the entire population of north Gaza should relocate within 24 hours.