EUROPEAN FX UPDATE: DXY on a firm footing on month end, JPY extends losses post-BoJ, and Antipodeans outperform on Chinese stimulus hopes

Analysis details (09:24)

DXY

• The index is kicking off the last trading day of July on the front foot and going against some month-end models, albeit likely on the back of BoJ-induced JPY weakness overnight (more below). The Dollar digested comments from Fed voter Kashkari who suggested he is not sure when the Fed will be done raising rates, but they are making good progress, whilst keeping a data-dependent approach.


• Desks emphasise the importance of US data between now and the September 19-20th FOMC confab – with this week seeing the ISM PMIs and the US Jobs Report. Later today markets will see the Federal Reserve's Senior Loan Officer Survey, with participants poised to see how much credit conditions have tightened – desks noted the ECB’s equivalent – the Bank Lending Survey (BLS) – last week contributed to some EUR weakness.


• The Dollar index has recovered from an APAC low of 101.57, but resides in a tight range with the upper bound at 101.85 intraday, ahead of Friday’s 102.04 high, whilst from a technical perspective, the 100 DMA and 50 DMA reside at 102.39 and 102.51 respectively, with the high from the 10th July at 102.56, whilst the downside, the 21 DMA sits at 101.40.


• Month-end models this month point to Dollar selling - Credit Agricole’s month-end sees "real money USD selling & corporate EUR buying again" whilst also noting flows are likely to be mild USD selling across the board, with the strongest sell signal in USD/JPY, while the corporate model is indicative of EUR buying. Barclays meanwhile says the passive rebalancing model at month-end shows weak USD selling against all majors.

JPY

• The JPY resides as the marked laggard following the BoJ’s back-door YCC tweak last week, which was undermined by an unscheduled JGB operation as the 10yr JGB yield topped 60bps.


• To recap Friday’s decision, the BoJ kept its policy settings unchanged, as expected with the Bank Rate held at -0.10% and YCC parameters maintained to target 10yr JGB yields around 0%, but it will guide yield curve control more flexibly with its daily fixed-rate purchases of 10yr JGBs at a rate of 1.0% (prev. 0.5%). This essentially means the +/- 50bps band for the 10yr JGB target will now be used as a reference point in market operations, allowing for greater flexibility – i.e. the actual yield could occasionally move outside of this range.


• Between the overnight operation and the constructive mood overnight, USD/JPY topped 142.00 from a 140.70 base – rising above its 21 DMA and 50 DMA (at 141.01 and 141.02 respectively) to a current 142.22 high – with clean early seen until the 10th of July peak at 143.00. USD/JPY OpEx for today’s NY cut sees USD 1.2bln at strike 140.00, USD 1bln at 141.00, and USD 1bln at 142.50.


• In terms of JPY pairs at the time of writing, EUR/JPY topped its 21 DMA (155.92) and trades towards the top of a 155.36-156.65 range. GBP/JPY rose above its 21 DMA (181.71) to a 182.89 high from a 181.17 intraday trough. AUD/JPY outperforms (+1.4%) amid AUD strength (see below) and JPY weakness, with the cross rising above 95.00 to a 95.16 high from a 93.64 base – rising above its 50 DMA (94.47) and 21 DMA (95.00) in the process.

AUD, NZD, Yuan

• The antipodeans are the standout outperformers amid Chinese stimulus optimism, with a string of recent reports suggesting China is focusing on its ailing domestic consumption, whilst China’s Manufacturing PMI marginally topping expectations could be providing some tailwinds.


• It’s also worth keeping an eye on Australian coal demand as China’s export bank on germanium comes into effect tomorrow - germanium is primarily obtained as a by-product of zinc production (75%) and from coal (25%). Furthermore, traders will be waiting for the RBA policy decision with markets split between a hike or hold following the cooler-than-expected Aussie CPI data.


• AUD/USD holds onto APAC gains in European hours, with the pair finding a base at 0.6649 before testing 0.6700 to the upside, with the 100 DMA and 50 DMA around 0.6691 and 0.6698 respectively ahead of Friday’s 0.6713 peak and the 200 DMA at 0.6729. NZD/USD briefly rose above its 100 DMA (0.6198) and resides in a 0.6150-6205 parameter. The CNH is relatively flat intraday vs the USD in a 7.1330-1560 range.

EUR, GBP

• The EUR and Sterling are relatively flat against the Buck and each other with participants keeping in mind month-end flows around the London fixes.


• Data-wise, EUR/USD saw a modest downside as German PPI fell below expectations while Retail Sales were mixed. All eyes turn to the EZ CPI at 10:00 am London time, although from a policy perspective, it is worth noting that there is another inflation report to follow ahead of the September meeting, however, market participants will likely use the upcoming release as a chance to adjust expectations which currently assign a 72% chance to no move and 28% probability of a 25bps hike (at 09:15BST).


• EUR/USD holds onto 1.1000 status in a current daily range of 1.1006-28, with OpEx for the NY cut seeing EUR 1.6bln at 1.1000 and around EUR 3bln scattered between 1.1075-1.1100. GBP/USD trades in a 1.2843-67 parameter (with the 21 DMA at 1.2886) while EUR/GBP sits in a 0.8562-82 range.

31 Jul 2023 - 09:29- ForexData- Source: Newsquawk