Daily Market Outlook, September 11, 2023

Munnelly’s Market Commentary…

Asian equity markets displayed a mixed performance driven by rising yields, triggered by comments from BoJ Governor Ueda. Ueda mentioned the possibility of having enough data by year-end to decide on ending negative interest rates, emphasising a smooth exit strategy. This led to varied outcomes in major indices. The Nikkei 225 declined by 0.5%, reacting to Governor Ueda's comments, which pushed the 10-year JGB yield above 0.70% for the first time since 2014. However, losses in the index were cushioned by optimism in the banking sector, driven by the exit-related discussions and Japan's plans for substantial economic stimulus measures.

In contrast, the Hang Seng index in Hong Kong dropped by 1.5%. It struggled to recover from the losses incurred last Friday, exacerbated by disruptions caused by a black rainstorm closure. Weakness in the property sector further weighed down the index, and Alibaba shares faced challenges as its former CEO, Daniel Zhang, stepped down from the cloud business.

Conversely, the Shanghai Composite in mainland China saw a 0.6% gain. This was partly due to mixed inflation data, which showed that the headline Consumer Price Index (CPI) year-on-year was softer than expected but no longer in deflationary territory. Additionally, China's National Administration of Financial Regulation eased rules, allowing insurers to purchase stocks.

Looking ahead, in the Eurozone the focus will shift to the European Central Bank's (ECB) policy update scheduled for Thursday. The decision on whether to maintain the status quo or continue with a tenth consecutive interest rate hike hangs in the balance. Economists are divided in a Bloomberg survey, while market sentiment slightly favours a decision to keep rates unchanged, with a 35-40% probability of a hike. The debate between hawkish and dovish ECB members continues, with concerns about the Eurozone's weakening growth outlook supported by recent PMI surveys pointing towards GDP contraction in Q3.

The upcoming week Stateside will revolve around key economic data releases, with a significant spotlight on Wednesday's Consumer Price Index (CPI) report. This heightened attention is a result of the recent increase in Treasury yields, driven by market expectations that the Federal Reserve might consider raising interest rates in November, thanks to the continued resilience of the U.S. economy. Specifically, markets anticipate that the August core CPI will moderate, showing a yearly rate of 4.3%, down from July's 4.7%. Should the actual reading surpass this projection, it would heighten the probability of the Federal Reserve implementing at least one additional rate hike in the near term. Such an outcome would underscore ongoing inflationary pressures.

FX Positioning & Sentiment

.In recent trading activity, there has been a reduction in the number of traders who are betting on the EUR/USD currency pair to rise. Since July 21st, the EUR/USD exchange rate has experienced a notable decline, moving from 1.1276 to 1.0686. Despite this decline, it's worth noting that only $6.8 billion out of the total $25.1 billion of bullish bets on the EUR/USD have been scaled back. As of the latest data, there are still substantial long positions in the market, with approximately $18.2 billion worth of bullish bets remaining. This suggests that while some traders have adjusted their positions due to the recent decline in the EUR/USD, a significant portion of market participants still maintain a positive outlook on the currency pair.

CFTC Data As Of 08-09-23

USD net USD G10 short -$3.4bn in Aug 30-Sep 5 period, $IDX +1.17% in period
Fed high for longer versus whiff of steady ECB, less austere BoE lifts USD
EUR$ -1.42% in period, specs -10,448 contracts now +136,231
Sellers overwhelm bottom-fishers as king USD reigns, pair flat since Tuesday
$JPY +1.23% in period, specs +1,337 contracts now -97,136
Longs sell USD ahead of expected intervention area near 150
GBP$ -0.68% in period, specs sell 2,017 contracts now long 46,384
Traders sense dovish BoE shift, high BoE rate path tempers GBP weakness
CAD & AUD shorts rise 9k & 13k respectively amid weak China growth view
BTC -6.79% in period, specs buy 532 contracts long grows to 2,039 contracts (Source: Reuters)

FX Options Expiries For 10am New York Cut

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

EUR/USD: 1.0580 (260M), 1.0700 (681M), 1.0830 (281M)
1.0910 (684M)
USD/JPY: 145.00 (895M), 146.00-20 (565M), 149.00 (599M)
EUR/JPY: 159.00 (322M)
USD/CHF: 0.8650 (866M), 0.8950-55 (305M)
GBP/USD: 1.2475 (254M), 1.2590-00 (590M)
AUD/USD: 0.6325 (300M), 0.6480 (280M)
NZD/USD: 0.5700 (231M), 0.6500 (226M)
AUD/NZD: 1.1050 (398M). USD/CAD: 1.3600 (478M)

Overnight Newswire Updates of Note

China’s CPI Rise 0.1% In August, Pointing To Weak Demand But Easing Deflation Fears
BoJ Ueda: BoJ Could End Negative Interest Rate Policy, Watching Wages & Prices
Japan PM Says He Plans Cabinet Reshuffle, 'Drastic' Economic Measures
PBoC: FX Market Is ‘Operating Steadily,’ Is Confident In Maintaining Yuan Stability
Australian PM Keen To Ink EU Free Trade Agreement 'As Soon As Possible'
Yellen ‘Feeling Very Good’ About Soft Landing For US Economy
Biden Says China Less Likely To Invade Taiwan Amid Economic Downturn
Sunak Hints At Benefits Cut After 'Huge' Rise In Payments
Meloni Tells China That Italy Plans To Exit Belt And Road
Yen Rises After Ueda Comments On Wage Growth And Negative Rates
JGB Yields Rise After Report Says BoJ Governor Signals Possible Rate Hikes
China’s Yuan Rallies Off Recent Lows On Record Strong Fix Signal
Country Garden Nears Key Deadline On Bid To Extend Yuan Bonds
Chevron Appeals To Workplace Tribunal To Halt Australia LNG Strike Action
Japan Banks Surge With Yields On Ueda Comments On Negative Rates
Alibaba Says Daniel Zhang Quits Cloud Business In Surprise Move
Meta Is Developing A New, More Powerful AI System As Tech Race Escalates
Instacart To Target Much-Diminished Valuation Range Of Under $10 Bln In IPO