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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: $1.2200, $1.2215, $1.2225, $1.2230 (large), $1.2400, $1.2550;
USD/JPY: 78.75, 79.00, 79.85, 80.00;
AUD/USD: $1.0200, $1.0350;
EUR/AUD: 1.2065;
EUR/GBP: 0.8020, 0.8030, 0.8070;
NZD/USD: $0.8000.
Aussie hit by poor jobs data
Australian dollar dropped versus the greenback from the pivot point (200-day MA) breaching uptrend support line from the beginning of June.
Aussie got hurt due to the discouraging Australian labor market data: the number of jobs contracted by 27K last month (vs. + 0.2K expected). Australian currency is also affected by the expectation of Chinese growth slowdown. China’s GDP is released tomorrow and its growth rate is forecasted to decline from 8.1% in the first 3 months of the year to 7.9% in Q2.
Analysts at Westpac claim that Australian jobs report is “pretty horrible”. The specialists underlined that all jobs that were added were part-time and that’s a bad sign. Strategists at NAB, on the other hand, think that things as not as gloomy as they seem. In their view, the unemployment rate of 5.2% remains low by historical standards. The odds of another RBA rate cut increased, but such move in August still seems unlikely as Australia’s monetary authorities will like to watch for the effects of their recent rate cuts. The central bank cut rates in May and June to 3.5% and stayed on hold in July.
AUD/USD set the daily minimum at $1.0135 and then recoiled up to $1.0150. Support lies at $1.0125 (June 28 maximum), $1.0090 and $1.0055. Resistance lies at $1.0200, $1.0225 and $1.0240.
Chart. H4 AUD/USD
Commerzbank: forecast for GBP/USD
Technical analysts at Commerzbank note that GBP/USD has recently completed consolidation.
In their view, British currency will return to $1.5600 and then slide from this point firstly to $1.5403 (June 8 minimum) and eventually to $1.5268/33 (June 1 minimum and 2012 minimum) and then possibly to $1.5000/1.4990.
According to the bank, resistance lies at $1.5593/1.5600 (June 25 maximum, June 7 peak) and $1.5750/85 (200-day, 200-week MAs, 50% Fibo retracement of the decline in May).
Chart. Daily GBP/USD
Barclays Capital: bearish on USD/JPY
Analysts at Barclays Capital are bearish on USD/JPY and recommend going short on the pair at 79.6, setting a stop at 80.0 and targeting at 78.0. In their view, slowed global growth and European woes are likely to push the Japanese currency up, while the BoJ is unlikely to extend the asset purchase program.
However, improving risk sentiment and more aggressive BoJ easing could threaten the yen’s strength. Japan’s monetary authorities claim they are ready to loosen policy in order to reduce the deflationary pressure on the economy. Core consumer prices contracted for the first time in 4 months sliding by 0.1% y/y in May, while Tokyo core CPI fell by 0.6% in June – the BOJ’s 1%-inflation target seems like very hard to attain.
Chart. Daily USD/JPY
NAB: AUD/USD to fall below parity
Analysts at NAB expect AUD/USD to drop below parity by the end of 2012 on the back of the slowed global growth and lower prices on raw materials.
Specialists devote considerable attention to weak economic releases coming from China lately. China’s slowed economic growth could pull AUD/USD to $0.97.
According to CFTC report, traders remain in net short positions on AUD for six consecutive weeks (the longest stretch since 2009) as falling export prices raise concerns the RBA will cut rates further.
Chart. Daily AUD/USD
EUR/USD: fundamental & technical
Fundamental
- Spanish Prime Minister Mariano Rajoy announced yesterday 65 billion euro ($80 billion) of new austerity measures in a renewed effort to meet EU budget targets after the nation was granted another year to reduce the budget deficit. Now Spain has until 2014 to bring its deficit within the EU’s 3%. This is Spain’s fourth austerity package in 7 months and the new flashpoint for supports and the opposition.
- Finland is in discussions to get shares in Spanish banks as collateral in exchange for its contribution to the bailout.
- Euro zone May industrial output +0.6% m/m, -2.8% y/y, better than consensus forecast.
- ECB monthly bulletin: heightened uncertainty, some downside risks to growth outlook have materialized.
Spanish 10 year yields are up by 3 bps on day at 6.61%.
Technical
Strategists at RBS recommend selling EUR/USD up to $1.2290 (June minimum) targeting $1.1875 (2010 minimum) stopping above $1.2350 (the recent cluster of daily maximums).
Analysts at UBS claim that key support for EUR/USD lies at $1.2152. If euro breaches this level, it will slide to $1.2000. Resistance lies at $1.2336 and $1.2402.
Chart. H4 EUR/USD
China's GDP is to disappoint markets
China’s GPD release on Friday attracts investors’ attention as will define the risk sentiment and influence the commodity currencies. Most analysts expect the second largest economy in the world to grow below the expectations in Q2 (consensus: 7.9%; previous print: 8.1%).
Experts at Development Research Centre expect China’s economy to grow by 7.5% in Q2. In the second half of 2012, however, the economy is likely to recover modestly as the monetary policy measures will bear fruit. China’s economy could grow around 8% in 2012. Specialists believe the world's second-largest economy is entering a phase of more modest expansion in comparison to the 10% annual average rate in the past three decades, but it could still maintain a 7-8% annual rate in the next 10 years. Still, any reading below 8% tomorrow will hit the market's risk sentiment.
According to Barclays Capital forecasts, China’s June industrial production may exceed the 9.8% forecast, but this small positive result will be offset by the negative GPD surprise. In their view, the weaker-than expected GDP will hurt the Aussie.
Chart. China's GDP (2003-2012)
Source: forexfactory.com
FBS Quarterly Report
Q2 Review
Every quarter of the year is a small lifetime. In the first 3 months of the year the main topic of the headlines was US economic data. In Q2 everyone’s attention was focused on Europe. We have lived through a half of the year and now it’s time to pause and asses the past events and the market’s developments.
Europe
Political mess
European woes frayed investors’ nerves pretty much this spring and early summer: it’s the third year of the euro zone’s debt crisis, yet both political and economic situations have been extremely strained.
Once again Greece got in the highlight scaring the hell out of the markets with its huge debt, incapacity to form a parliamentary coalition and unwillingness to meet the EU conditions. The nation’s exit from the currency block seemed as possible as never before. It took the Greek 2 attempts to finally form the workable government.
The French presidential vote was another spot of the market’s increased attention. Francois Hollande won on the back of his anti-austerity program. Meanwhile, German Chancellor Angela Merkel kept losing support at home: the German don’t want to pay for their debt-stricken neighbors. Even earlier, when Merkel-Sarcozy duet was navigating the course for its neighbors, the region’s policymakers didn’t manage to run the things smoothly. As the euro zone’s ruling couple broke up, European leaders faced a lot more troubles reaching consensus as diverging interests prevent them from conducting a coordinated policy.
One could think that after the Greek tensions somewhat eased, the region would be on the mend. Never the less, it’s not that simple. Market’s attention has instantly switched to larger Spain and its troublesome banking sector. On June 25 Spain officially requested bailout for its credit institutions.
Euphoria - EUROphoria
The June 28-29 summit went well and was presented by the policymakers as a breakthrough. The EU authorities promised fresh capital for Spanish struggling banks. The European Union also pledged to allow the 500 billion-euro European Stability Mechanism (ESM) to aid euro zone banks directly. This, however, will become possible only after a joint bank supervisor for the euro zone replaces the existing network of national regulators – this to be done by the end of the year.
However, the relief was, as usual, short-lived. Even though euro zone leaders may have found political will to solve the crisis, it’s clear that there are no quick solutions. The agreement announced at the summit excluded any longer-term policies to address the underlying European issues. Germany remains in stubborn opposition to the idea of common Eurobonds regarded by many economists as the only way to save the currency union. This stalemate looks very hard to resolve.
There are important decisions ahead. Greece has to renegotiate its bailout with the Troika – the new round of talks will begin on July 24. Until the revised bailout agreement is signed, there will be no further disbursements from the ESM to Greece beyond 1 billion euro withheld from the May tranche. Greece has to pay bonds maturing on August 20 and it won’t be able to do that without external help.
Photo from dailymail.co.uk
Discouraging economic prospects
Signs of economic weakening may be witnessed all over the world – in Europe, Asia and the United States. The European crisis is surely weighting on global demand and will keep doing so in the coming months taking into account the uncertainty about the region’s regulatory and fiscal policy outlook.
For now we don’t think that European economy may start rebounding. If the currency union’s, US and Asian economic performance is really better than expected, the likelihood of further monetary stimulus will surely decline. The equities won’t take it well, so the risk sentiment will get hurt. The worse data releases are, the more aggressive the monetary policy response from the central banks will be and stock markets will likely run up on the easing news spurring investors’ risk appetite.
Many economists have correctly pointed out a very important thing: the situation isn’t the same as 4 or even 1-2 years ago. The main thing which has changed is monetary conditions. The central banks have already done much to prop up the stumbling advanced economies, so the efficiency of new steps in this direction is questionable.
Here are the world’s major central banks’ rates:
All in all, the biggest global risks are:
- Escalation of European crisis;
- Stalling recovery in the United States;
- Slowing growth in Asia;
- Geopolitical instability in the Middle East.
Take a look at this snapshot of the key latest data for the world’s leading economies.
Euro area
According to Fitch Ratings, the European crisis worsened in Q2 amid the deterioration in global economic prospects, capital flight from the peripheral countries, bond yields rise and anti-austerity sentiments. Euro zone’s unemployment rate rose in May to the record maximum of 11.1%. The poor labor-market conditions and the negative effects of fiscal consolidation will continue dampening household disposable income. Specialists at the Ifo institute claim that the 17-nation currency area’s GDP may have shrunk by 0.2% during the months from April to June and will contract by 0.1% in the next 3 months before growing by 0.1% in Q4. The European Commission projects that the region’s economy will contract by 0.3% this year.
FBS Quarterly Report part 2
The United States
The ISM manufacturing PMI, a good indicator of the economic health of the manufacturing sector, shows that in June the industry switched to contraction after 34 months of expansion. The situation at the labor market – the key area of the Fed’s concerns – isn’t bright either. Investors had to forget that American economy generated 200K of new jobs a month in winter with 70-115K monthly gains in Q2.
Now, as the expectations are low, data in the coming months may surprise to the upside. We may see some improvement in the second half of 2012 as it was last year. However, one thing is clear – the recovery surely won’t be robust and self-sustaining. Even if Q3 turns out to be better than expected, there will be no reason to get deluded with vain hopes. Also note that November presidential election will bring back concerns about US fiscal health. The more detailed report on US economic prospects prepared by FBS analysts may be found here.
Unconventional US Federal Reserve’s monetary policy remains the largest risk to the greenback’s safe-haven status. Will there be the third round of QE? As the Fed refrained from such action in Q2, it would likely take a substantial worsening in economic and financial conditions to US central bank to announce additional bond purchases.
China
China’s latest economic data point to a deepening slowdown making domestic social and political situation more and more tense. The world’s fastest growing economy is experiencing the deepest slump in growth rates since the 2008 global crisis. This could hurt Chinese demand for imported oil, iron ore and industrial components.
The People’s Bank of China is also riding the monetary stimulus wave: the central bank has cut interest rates for the second time in 2 months in the latest attempt to bolster slowing growth. Experts say more easing may follow.
All in all, the hopes that the Asian nation will drive global sales in the foreseeable future amid anemic demand in the United States and debt-crippled Europe are fading.
Currency majors in Q2 2012
Japanese yen was the best performer versus the greenback among G10 currencies in Q2 unlike Q1 when it lost 7% against its US counterpart. Apart from yen, American currency gained versus all its major counterparts.
Q3 prospects
EUR/USD
The single currency is entering Q3 in a clear downtrend after forming a flag in May-June. Although euro finished last month with a sharp advance, it ended 5% down due to the sell-off in April.
As we’ve said earlier, there have been some positive shifts in the euro area, but it takes the implementation of fundamental changes to solve the crisis – the development which can be hardly seen at the horizon these days.
Spain represents the greatest risk for the currency market. The nation’s 10-year yields remain close to the dangerous 7% level. Even though Spanish banks have been granted support, the nation’s government itself may ask for help to mend finance amid recession and unemployment of nearly 25%.
It’s also necessary to note that as the market players remain extremely bearish on euro, there should be a substantial shift in positioning and sentiment to signal that the European currency has a sustainable chance to reverse upwards.
GBP/USD
At the end of April GBP/USD reached $1.6300, the maximal level since August 2011, before slumping by more than 900 pips in May. In June the pair managed to correct upwards, but then it resumed downward movement.
British economy fell back into recession around the turn of the year and a string of weak economic data has pointed to another quarter of contraction between April and June. The Bank of England remains concerned with the state of the country’s economy: the central bank began Q3 with the 50-billion-pound increase of its asset purchases leaving open the door for further monetary stimulus.
There’s a reason to turn down the gloomy views on sterling, at least for the month ahead. We’re speaking about the Olympic Games which start in London on July 27. Thousands of visitors arriving to the UK will be buying pounds this summer. So, pound has chance to strengthen, especially against the single currency.
Things may dramatically change, though, once the Olympics are over on August 12 and British are left alone with their shaky economy – home currencies tend to fall by around 3% in the year following the Games. One should, of course, remember that Britain remains extremely vulnerable to the events in the euro zone through trade and banking links. Sterling’s attractiveness as safe haven from European crisis may be outweighed by the negative impact of euro zone’s problems on the UK economy. After all, there are other refuges.
USD/JPY
The USD/JPY trade will likely remain quite choppy. Although the bears were more successful in Q2, the pair is still above 77 yen – the level at which it started 2012. The greenback is pressed between support and resistance – both levels used to be strong. At the same time, the consolidation within a triangle is coming to an end and we are to brace for the breakthrough to either side.
The key factor here is the same – the Bank of Japan – yen’s future depends on how aggressive its actions will be. On the one hand, the BoJ raised its fundamental assessment of all the nine regions for the first time since October 2009. At the same time, the central bank still has to fight 2 main enemies of the nation’s economy – deflation and strong yen.
Japan's core consumer prices contracted for the first time in 4 months sliding by 0.1% y/y in May, while Tokyo core CPI fell by 0.6% in June – the BOJ’s 1%-inflation target seems like very hard to attain. We believe deflation will be the policymakers’ primary concern and this battle will require additional monetary stimulus.
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July 13: economy and currencies
The markets were apathetic to China’s GDP release: everyone has already submitted to the fact that the growth pace of world’s fastest growing economy is slowing down. Even the consensus was dragged lower before the release from 7.9% to 7.7%. The data released today showed that Chinese GDP increased by 7.6% in Q2 after extending by 8.1% in the first 3 months of the year. Chinese industrial production and retail sales grew a bit less last month than in May, while the advance in fixed asset investment was slightly bigger.
Investors are now much more preoccupied with what’s happening in Europe, particularly in Italy. The nation holds a 10-year bond auction. Overnight Moody's ratings agency downgraded Italy's government bond rating by two notches to Baa2 from A3. According to experts, Italy’s near-term economic outlook has worsened: weaker growth and higher unemployment creates risk of failure to meet fiscal consolidation targets. On Thursday, however, Italy raised 7.5 billion at a lower rate than previously, indicating improved investor confidence.
US is to release PPI (forecast: a 0.5% decline in June), core PPI (forecast: a 0.3% growth in June) and preliminary UoM consumer sentiment index (expected to increase to 73.5 in July).
Risky currencies are trading on the upside today, though they are set for the weekly declines due to the general pessimism. The MSCI Asia Pacific Index of shares added 0.6% after falling by 0.2%. Analysts at Westpac underline that the growth momentum is still slowing down, though there may be more of a short squeeze in the currencies like Aussie in the near term.
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