Article / 16 June 2016 at 11:35 GMT

Mid-session Europe: Through the valley of the shadow of debt

Saxo Markets


Foreign exchange


Risk is very much off today as gold strengthens, the yen trade swells, crude oil continues to wilt, and – of course – the nation whose capital remains Europe's largest financial centre waits to vote on whether it will leave the European Union.

European stocks are down on the day, as is EURUSD. The rally seen of late in industrial metals has bageun to taper somewhat while the FX Options market shows a bid in six-month EURUSD tenors as they now cover the December Federal Open Market Committee meeting.

After a brief spike late yesterday, 10-year German bund yields are again in negative territory – just one more signal that we are in uncharted waters.


  • US May CPI (1230 GMT)
  • US Initial Jobless Claims (1230 GMT)
  • US June NAHB Housing Market Index (1400 GMT)         

Forex developments

EURUSD: We wrote yesterday that rallies in EURUSD were not expected to last even with a dovish Federal Reserve, and so far this has been the case. The pair was slightly above the resistance level we mentioned yesterday at 1.1294 and this also happens to be the high of the day. EURUSD has been sold off since the opening of the European exchanges, which are all in the red so far. EURUSD has now been trapped in the range between its 100-day moving average (today at 1.1221) and its 55-day moving average (at 1.1308 today) since June 10, and would be a nice sign were we to close the day beyond these levels for further direction. The more interesting tech support is at 1.1185/90 where EURUSD stalled for two days, which then opens up to the 1.1130 area. Very decent tech support at 1.1100 (200-week moving average).

USDJPY: Undoubtedly the star of the day following the Bank of Japan meeting. Broke the level we had been watching at 105.5 lately and has since moved sharply lower. Next tech level that is of interest is around the 101.50 area. This happens to be the area around which USDJPY hovered for the first half of 2014. The important tech resistance would be 105.50, and then the 200-week moving average at the 106.06 area.

GBP: EURGBP hovering around the 200-week moving average at 0.7924, and has been finding these levels as support lately in an attempt toward 0.800 where it has failed a number of times this week, so it will be interesting to see if the trend continues.

Commodity currencies: AUDUSD one of best movers yesterday and today is taking a beating along with CAD with the risk-off mode and lower oil for CAD. NZD surprisingly not weaker, despite risk off mode. Important technical support for AUDUSD lies at 0.7326 (Fibo level 50% from rally starting May 30, and has survived two attempts down there so far. It has its 200-day moving average at 0.7250 so this should be a decent technical level.

FX Options volatilities
EURUSD options are still in demand with the six-month tenor notably better bid today as it covers December's Federal Open Market Committee meeting. EURCHF options see downside gamma in demand. USDJPY volatility started bid due to lower spot (1m at 14.5), but is trading lower again now 13.7.

Risk reversal is trading very dear, especially in EURJPY but also in USDJPY, and today the market mainly looks to buy JPY puts and sell JPY calls to benefit from the this. We have seen interest to sell EURJPY 25 delta puts against buying 6m 25 delta EUR calls, so both earning the skew on the risk reversal but also earning skew on the curve. GBP volatility basically unchanged.

Fixed income
Bund futures have dropped back having reached a new provisional high at 165.64 this morning which is minus 0.04% in yield terms. Sentiment has improved somewhat since the opening bell, which is also felt in corporate bond markets where credit spreads have improved narrowly but remain wider at 380 basis points. However, the upcoming Brexit phone polls this afternoon could materially shift sentiment in either direction.





European stocks dropped Thursday. Germany’s DAX 30 lost 1.2% to 9,492.30, and the CAC 40 abandoned 0.9% to 4,133.86. The U.K’s FTSE 100 fell 0.6% to 5,928.36. The euro was up 0.1% at $1.1279.

Risk is still off as investors are gripped by concerns about slowing global growth as the Brexit vote approaches.

Yesterday, the Fed trimmed its growth forecast for 2016 to 2% from 2.2%, and as the central bank indicated it will take an even slower approach to raising interest rates, but traders are questioning the Fed’s strategy. Fed chair Janet Yellen also said that the UK’s June 23 referendum on was a factor in its decision to leave interest rates steady.

A fresh opinion poll from Ipsos Mori on Thursday showed a six-point swing from “remain” to “leave,” putting support for a Brexit in the lead.

Banks are taking the biggest hit, with shares of Credit Suisse Group AG down 2.6% and UBS Group AG off 1.9%. The Swiss National Bank said those lenders will need about 10 billion Swiss francs ($10.42 billion) in new capital to meet Switzerland’s new capital requirements. The SNB made the statement in its 2016 financial stability report Thursday.

Other bank stocks were also in the red, hurt by low bond yields and the prospect of a Brexit. Banco Comercial Portugues SA dropped 5.3%, Banco Popular Espanol SA lost 4.6%, Commerzbank AG gave up 2.4%, and Banca Monte dei Paschi di Siena SpA fell 2.9%.

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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: FOMC waits for sun, moon and stars to align

Asia:      Morning Report APAC:  Dovish Fed drives US stocks lower, Asia to follow

Difficult markets

When there's nothing to do but keep moving. Photo: iStock

— Edited by Michael McKenna and Clare MacCarthy

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