Forex Market Subdued Ahead of FOMC, GDP

Investors appear to be positioning themselves conservatively ahead of the first reading of second-quarter U.S. gross domestic product data tomorrow. It’s no surprise that there is very little movement in the major currency pairs before such a major economic release. Everyone seems comfortable in keeping his or her powder dry ahead of three days of heavy events and data risks that also includes the two-day Federal Open Market Committee meeting tomorrow and last month’s U.S. jobs report on Friday.

Any forex market action thus far can be attributed to Asia with European dealers content to sit on their hands ahead of the transatlantic market handover. They are patiently waiting for fresh details on the latest round of European Union and U.S. sanctions against Russia — no one wants to make any false moves so late in the game.

The kiwi dollar continues to flounder a week after the Reserve Bank of New Zealand’s expected “tight-dovish” response (hike rates while indicating a holding pattern). This time the blame sits with the country’s dairy giant Fonterra Cooperative Group which slashed its forecast for milk payments to farmers. Fonterra’s predictions managed to put downward pressure on the kiwi, shaving half-a-cent off it after the announcement (NZD$0.8510). In Japan, USD/JPY has managed to print a fresh three-week high in the overnight session, briefly trading above the psychological ¥102 handle on a combination of month-end dollar demand and with the Nikkei ending the day nicely in the black.

BoJ Sees Good Omen in Labor Data

Keeping analysts awake was the release that Japan’s unemployment rate actually climbed (+3.7% versus +3.5%) despite a multi-year high in job availability (job to application ratio: 1.10 — highest rate in 22-years — versus 1.09). Japan’s labor force participation rate month-over-month remained unchanged at + 59.9%. Thus far, Japan’s economic data for June has been consistently disappointing. Accompanying the weak labor numbers was last night’s soft retail sales release (-0.6%), which could suggest that Prime Minister Shinzo Abe’s higher consumption tax imposed in April continues to constrain domestic spending. The Bank of Japan’s (BoJ) hands are currently tied and it’s natural for the bank to remain rather optimistic. Board members continue to call Japan’s economic recovery “moderate” and remain confident in achieving their +2% inflation target. Nevertheless, the BoJ insists it would adjust policy if necessary after examining risks. The time for the BoJ to reassess its outlook on exports may be at hand with an upcoming policy meeting scheduled for early August.

Euro Wedged in Tight Range

Bullish euro traders should be counting their blessings that the single currency remains contained to a tight trading range. The market has just passed the two-year anniversary of European Central Bank President Mario Draghi’s declaration that saved the EUR when he uttered three words: “Whatever it takes.” The unit is currently handcuffed by a plethora of option expiries, approximately €2B worth within the €1.34-35 range. This in itself, and not sanction rumors or jockeying for economic positions, is likely to take a firmer grip in an already moribund market. EUR option bids precede stop levels at €1.3400-10. It’s rumored that CTA exit orders are beginning to pile up just south of €1.3375 mark, while Asian interest has similar orders on the topside, but a big figure higher (€1.3475). The lack of forex interest has investors looking at both equities and the fixed-income market for opportunities. Until Group of Seven rate divergence actually occurs, opportunities are limited for the bigger forex moves, and it explains why major currency positioning is relatively neutral.

With equity bourses in neutral territory ahead of the U.S. open, it has again favored the German bund. There has been better buying from a variety of accounts, including overseas and hedge funds for that curve, ever since old record highs were broken. Also aiding the demand for debt product is month-end — it’s extending the bund’s “bull flattener.” The general lack of market liquidity across the various asset classes has managed to exaggerate price moves. This is also a seasonal phenomenon; and probably hardest hit in the summer months. The bund “bull flattener” is being driven by big European extensions, supposedly twice the monthly average over the past year, pushing the 10-year German benchmark to +1.15% or -132bp back of its U.S. equivalent, U.S. 10’s +2.47%.

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