Article / 20 September 2016 at 11:40 GMT

Mid-session Europe: The calm before the storm

Saxo Markets
Denmark

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Foreign exchange

Forex
 
Markets are generally in wait-and-see mode ahead of tomorrow’s crunch Bank of Japan and Federal Open Market Committee meetings.

Former BoJ member Saturi Shirai (on the policy board up until earlier this year) suggested overnight a focus on more negative rates and away from more asset purchases would be the approach from here for the central bank. This would represent a significant disappointment for asset markets, particularly for longer bonds if there is a simultaneous shift away from buying up longer bonds to ensure a steeper yield curve.

Elsewhere, the Reserve Bank of Australia minutes threw up little surprises overnight, AUD showing little reaction. Our stance: an ugly overhang awaits their economy once this credit-fuelled phase of growth is exhausted.

On FOMC, 2 of the 23 preferred bond-trading partners are betting against the consensus, BNP and Barclays are forecasting a hike. The market remains unconvinced with the odds firm at a mere 20%

Finally, crude oil is back under pressure as the focus returns to a sustained global surplus.

Watchlist

  • US Housing Starts (1190k estimated / 1211k Prior) (1230 GMT)
  • US Weekly API Oil Inventories (2030 GMT)

v
Forex developments

Most of the G10 currencies are trading within a range in anticipation of tomorrow's key events.

EURUSD attempted to edge higher to the levels above 1.12, but failed to breach above 200-day EMA, returning to the mid-day averages of 1.1170-80.

USDJPY continues to slide on descending hypotenuse of the current triangle formation, with a potential breakthrough seen tomorrow on the BoJ decision announcement. Recent wicks on daily candles underline short-term support built around 101.5, with key support/resistance levels staying near 100/102.60.

GBPUSD lost ground earlier in the day with no clear catalyst behind the move, breaking through key 1.3000 level, watch for cycle low 1.2800. EURGBP was well bid from 0.8565 to 0.8608. 0.8600 a key hurdle as is 133.00 in GBPJPY

CNH continues to weaken, making its way to the historical maximums in the cross with USD after the recent mid-September failed attempt to dive below the 50-day MA. The CNY inclusion in the reserve currencies basket by IMF taking effect October 1 is not yet being very supportive.

FX Options volatilities
 
Vols
 
As elsewhere, it's all about the BoJ and FOMC meetings tomorrow. O/n volatility USDJPY is trading 32/37 or 135/160 pips. The EURUSD curve medium term is pretty stable, still some buying interest in very short dated 2d-1w to cover FOMC but the market doesn’t expect much. 2 days atm straddle is trading 75/85 pips.

All front end USD crosses are trading very expensive which is pretty normal going into major events. The USDJPY curve now compared to 1w ago: Very expensive very front end while the medium-term curve has been sold as the market expects volatility to fall after the event.
1 month USDJPY is down 1.5-1.75 % since last week. At the moment the market expects 1w-2w to trade around 10.0 after the events.

Fixed income

Rates
 
Bunds rallied, potentially off the German debt agency announced plans to reduce Q4 bond issuances by EUR 1bn (to 25bn) and reduce Q4 issuance of money market insurances (bills) by EUR 6bn (to 2bn), a total 7bn in cuts.

Commodities

Commodities
 
d
Equities

Equities
 
European markets opened largely flat before moving positive with them currently on their highs. STOXX Europe 600 is up 0.20% on light volume as we await the upcoming central bank meetings. Real Estate and Health Care sectors are the best performing sectors whilst Energy lags as oil showed overnight weakness.

On a fairly quiet day for corporate news, Bayer is trading up 2% after raising the sales forecast for its latest blockbuster drugs. The company is currently pursuing a $66 billion takeover of Monsanto.

GVC is up 3.5% after confirming H1 ahead of expectations and strong trading in Q3.

Mitie has recovered a little this morning following a large profit warning yesterday. Their shares are currently up 3%.

Join our Weekly OptionsLab on Wednesday to find out more on covered call strategy.

Read more

Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.

US:        US Market Wrap: Commodity bloc flips on oil flip-flop

Asia:      Morning Report APAC:   Asian markets quiet ahead of policy meetings




federal reserve
 The market's betting she won't hike. But she could. Photo: iStock

— Edited by Clare MacCarthy

The Global Sales Trading desk is a multi-asset team providing customised trading solutions
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