Firstly apologies for the late posting of my commentary.
Following the US holiday last Friday in the US, the market has opened and trading sideways today with a number of interesting Economic numbers due this week.
UK Industrial Production (Tuesday 8th expecting +5.6% from +4.4%), US Redbook (Tuesday 8th), China CPI (Wednesday 9th expecting +2.4% from 2.5%), FOMC minutes meeting (Wednesday 9th), BOE QE total and interest rate decision (Thursday 10th, unchanged), are the most important ones that come to mind.
All in all I think the market will continue on its current path given that we do not see any material changes amongst CB’s and the market in general. While the market overall anticipates the USD to mount a challenge, I think this challenge will come later (perhaps August/September) rather than over the coming month. The reason I say this is with the next NFP meeting on 01 August I would imagine the market wants to see if there will be a follow through from the awesome number we saw last week (+288k). No point loading up on USD only to see the NFP number come back somewhat muted. In other words there are a number of unsettled issues that still need resolving before the next real move happens.
So while I am still a firm believer that EUR/USD will head south (stronger USD), I am happy to wait until there is a more progressive move to rubber stamp the move. Even now the EUR/USD is teetering around 1.3600 (from 1.3580’s) telling me there is a chance we could see another attempt to take the EUR back to the 1.3675 resistance level.
GBP (USD and EUR) and given up some profits with v USD trading at 1.7125 from 1.7150 and v EUR at 0.7935 from 0.7920. Again this move has not surprised me given we have seen a strong robust and quick move down from 0.7970 on Thursday. Ask any trader and they will say the same thing….it is always a good sign when the market rebounds after a strong move showing healthy profits were taken. Overall the market is still prepared to wait and take GBP stronger…HOWEVER and it is a big HOWEVER, the NFP number on 01 August will be crucial as to what GBP will do next. I think vs EUR there is still a strong trend to take the EUR down towards 0.7750 (1.2900) and this could happen quite possibly throughout the coming month as long as the economic number in the UK remain on course for new highs. This week sees some important announcements so we will be watching the market closely to see what the next move will bring.
Looking at the FX options market, now that the US holiday and weekend roll is out the way, vols have climbed a little…EUR/USD 1m 4.5/4.75, 1y 6.00/6.10, GBP/USD 1m 4.5/4.7, 1y 6.3/6.5 and EUR/GBP 1m 4.55/4.70, 1y 6.25/6.375….basically all in line with expectation. No doubt the market still content to sell gamma and vega especially with Summer upon us. While one would expect the Summer to be “quiet” given lower liquidity, it sometimes turns out to be the opposite and catches the market unaware. Personally Summer 2014 is going to be flat and for this reason I see vols remaining offered (sellers market).
Wish you a pleasant day ahead.