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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2450, $1.2475, $1.2600, $1.2675 and $1.2700;
USD/JPY: 79.50 and 80.00;
EUR/JPY: 100.00;
AUD/USD: $0.9705 and $0.9800;
GBP/USD: $1.5650, $1.5735 and $1.5800;
EUR/GBP: 0.8000;
USD/CAD: 1.0200.
Photo by Reuters
Gloomy days for the euro area
The fundamentals for the single currency remain bad and the majority of experts see EUR/USD declining to $1.20 or even to the parity level. For example, Commerzbank targets 55-month MA at $1.2067.
Euro tries to edge up this week as the Greece's pro-bailout parties regained an opinion poll lead ahead of the elections on June 17, but failed to overcome resistance at $1.2625 (January minimums) showing that the bulls are extremely weak. More negative news added to the poor sentiment such as the problems with Spanish banks recapitalization and the nation’s downgrade by Egan-Jones Ratings.
Some specialists say that there may be some positive developments at EU summit on June 13, just a few days ahead of the Greek elections, as the European authorities will feel the need to something to persuade Greeks say ‘yes’. Most Greeks want to see the terms of an international financial rescue revised even as they acknowledge that not abiding by austerity measures required for the funds may lead to the country leaving the euro area.
Societe Generale notes that the situation in Greece is already terrible: unemployment reached 21.7%, while GDP is contracting by 7.7%. The biggest Greek lender NBG claims that is the nation leaves the currency union, its GDP will contract by at least 22%, jobless rate – rise to 34%, inflation – climb to 32% and lending rates – surge to 37% with new drachma devalued by around 65%.
In the nearer term the markets will be looking at ECB’s meeting next week. Analysts at Standard Chartered claim that the central bank to cut its benchmark rate one more time by 25 bps to 0.75% in Q3 before going on hold.
Chart. Weekly EUR/USD
Commerzbank: USD/CHF broke above resistance
Technical analysts at Commerzbank note that the greenback has at last managed to overcome resistance in the 0.9572/95 area (January maximums) trading versus Swiss franc, so the pair USD/CHF reached new 2012 highs and March 2008 minimum at 0.9636.
The specialists think that US currency may climb to 0.9950. In their view, support for the pair will be found at 0.9529/00 (May 28 minimum, May 18 maximum), 0.9368/35 (May 22 minimum, March maximums) and 0.9478 (Ichimoku Cloud support at H4 chart).
Chart. Daily USD/CHF
Bank of America: comments on USD/CAD
Analysts of Bank of America expect the Canadian dollar to fall to its lowest level since October as commodity prices keep declining. Strategists recommend going long on USD/CAD at current levels, targeting at C$1.0528 and with a stop at C$0. 9950.
Specialists note that raw materials account for half of Canada’s export revenue. The CRY (CRB) commodity index fell below 281 (the lowest level since September 2010). Moreover, specialists at Bank of America forecast a further decline to 257 in a near-term.
Net long positions on the Canadian dollar declined twofold (70K on May 4 vs. 38K on May 22). According to analysts, net longs were opened in February - March when the pair was trading at C$1.0053-0.9700. As a result, a further downward movement of the cross is expected.
Chart. Daily USD/CAD
Chart. The Thomson Reuters/Jefferies CRB Index
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Why is a Greek exit so dangerous?
A Greek exit from the single currency bloc is a burning question: words “increased uncertainty” have become a fixed collocation in recent months. Market participants massively abandon the common currency: EUR/USD has fallen 6% in May. Why does a tiny Greek economy strike terror into the hearts of investors?
According to analysts at Bank of America and JPMorgan, a so called “Grexit” would create a domino effect to other European countries: sovereign defaults, bank runs, credit crunches, recessions and, finally, new exits.
Economists at JPMorgan estimate that 1% economic slump in the euro zone economy will trigger 0.7% decline in the other countries. All the exporting countries are extremely vulnerable to Europe’s crisis, no matter if it is Great Britain, Russia or China. U.S., however, is forecasted to cope with upcoming problems with a smaller damage for the economy.
In case of exit analysts at Bank of America forecast the euro zone’s GDP to contract by at least 4% during the recession, what is close to the decline after Lehman Brothers collapse in 2008. The common currency is expected to fall to $1.20 levels. Other euro zone’s countries except Germany would suffer from increased borrowing costs (Spain’s bond yields have already reached critical 7%). However, strategists expect Greece to remain in the euro zone because of the high cost of the alternative.
According to economists at University of California, the influence of the Grexit on the global economy will depend on the preventive measures, taken to limit the contagion. If the efforts prove to be insufficient, the economic system will get beyond the control. Citigroup analysts are convinced that Greece will leave the euro zone on January 1, 2013.
Cartoon: Tom Janssen
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May 31: economic background
Trading volumes and monetary flows are high as asset managers and corporations adjust their positions in the last trading day of the month.
In Australia building approvals gave a negative surprise coming at -8.7% (m/m) in April vs. 0.3% expected gain. The readings of private capital expenditure and private sector credit, however, were good enough.
Elsewhere the data was generally quite positive: Swiss economy added 0.7% in Q1 (q/q), while economists saw it unchanged, German retail sales were above the forecast last month (+0.6% vs. +0.1%), though the index gained less than in March (+1.6%).
Spain and its banking sector remain the main source of the market’s pain. The nation’s 10-year bond yield rose reached 6.70% yesterday.
EUR/USD edged slightly higher, but remains close to the 2-year minimum at $1.2358. AUD/USD once again tested the levels below 0.9700, but then managed to recover a bit. JPY strengthened versus all of its major peers as investors want it as a safe haven. EUR/JPY is falling for the eighth day in a row showing the longest decline in almost 2 years. USD/JPY slid to more than 3-month minimum at 78.70.
Data to watch today:
Euro zone: euro area flash annual inflation is expected to decline slightly from 2.6% in April to 2.5% in May. If inflation changes direction and increase, it may lower the chances of the ECB interest rate to remain low. Ireland holds a referendum on EU fiscal compact. The vote is crucial as it determines a crossroad for Ireland: the ‘Yes’ vote to the treaty (the baseline scenario) could bring economic progress and financial stability together with unavoidable austerity measures. The ‘No’ vote will enhance downward pressure on the common currency.
US: A bunch of important US data will be released. ADP estimate of US non-farm payrolls in May is expected to reach 139K after 119K in April. Preliminary GDP release is expected to show a 1.9% growth in Q1 compared with a 2.2% growth in Q4, indicating that the US economy is not strong enough to drive global growth on its own. Chicago PMI in May is forecasted to increase to 56.8 vs. 56.2 in April. A small decline in unemployment claims during the last week is expected (369K vs. 370K).
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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
EUR/USD: $1.2500, $1.2560, $1.2570, $1.2625 and $1.2650 (large);
USD/JPY: 79.00, 79.80 and 80.00;
AUD/USD: $0.9820, $0.9850, and $0.9900;
NZD/USD: $0.7600;
USD/CHF: 0.9600;
EUR/GBP: 0.8100 and 0.8125.
AUD is weighted by weak equities
According to Bloomberg Correlation-Weighted Indexes, Australia’s dollar has lost 2.6% this year being the worst performer among 10 main developed-nation currencies after Sweden’s krona. Today AUD/USD once again tested the levels below $0.9700, but then managed to recover a bit, to $0.9730.
Building approvals gave a negative surprise coming at -8.7% (m/m) in April vs. 0.3% expected gain boosting the speculation the Reserve Bank of Australia will cut its benchmark rate on June 5. The readings of private capital expenditure and private sector credit, however, were good enough.
Analysts at Westpac claim that AUD/USD has potential for rebound in the near term: 14-day RSI was at 28.9, below 30 – the decline off Australian currency may have been too rapid and it has a chance for retracement. However, the specialists underline that Aussie’s prospects will be seriously affected by the declines in regional equities: Australian shares pared early losses but the main indexes post losses of more than 7% – one of the worst months since the global financial crisis erupted.
Strategists at Rochford Capital worry about Spanish problems and their negative impact on the market’s risk sentiment. In their view, AUD/USD will inevitably slide to a very important support area in the $0.9500/9450 area.
Chart. Daily AUD/USD
SocGen: you should be short on EUR/JPY
Analysts at Societe Generale are bearish on the single currency versus Japanese yen. In their view, EUR/JPY will surely hit at least 97.03 (January 2012 minimum). So, the specialists recommend either maintaining shorts if you are already selling euro or open new ones with stops around 101.00. According to SocGen, EUR/JPY is a good trading choice as euro’s weak due to the region’s problems, while yen is demanded as a safe haven.
The bank underlines that EUR/JPY could reverse upwards only in case of some major development in the current euro zone’s state, which seems unlikely for now. Societe Generale points out that the next important dates are 17 June (Greek elections) and 28-29 June (European summit). In addition, all news from Spain will be of great importance as well.
Moreover, SocGen remind of EUR/JPY’s correlation with core euro zone bond yields and the dynamics of EUR/USD. From this view, the pair’s prospects are negative: as 10-year German bund yield is at a historical low under 1.35%, while EUR/USD remains close to 2-year minimum and is expected to go even lower.
Chart. Daily EUR/JPY
EUR as usual looks vulnerable
The single currency rose today versus the greenback after 7 consecutive days of losses.
The market’s confidence in euro improved a bit as polls showed Ireland will vote for European Fiscal Pact at today’s referendum. In addition, German retail sales increased for the second month, while Spanish 10-year bond yields subsided from 6-month maximum and the ECB President Mario Draghi underlined that the central bank cannot resolve the problems caused by the lack of fiscal prudence and governance in the euro area.
Although the markets took some breath, euro still looks extremely vulnerable. Morgan Stanley thinks that there may be “a very brief pause in the downtrend in the euro because of the Irish referendum, but beyond that the news is fairly negative”. “Things are starting to look ugly. It seems like the market is making Spain its next target after Greece,” said analysts at Bank of Tokyo-Mitsubishi UFJ.
Analysts at BMO Financial Group recommend selling euro on potential rallies. The specialists advise to go short in the $1.2625 area (January minimum) stopping at $1.2725 and targeting $1.2325. In their view, “this is momentum and strong trend trading”.
Chart. Daily EUR/USD