Daily Market Outlook - Thursday, Oct. 12

By Patrick Munnelly of Tickmill

Thursday, October 12, 2023 4:30 AM EDT

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Image Source: Pixabay

Asian equity markets saw gains, supported by Wall Street's rebound and dovish Fed commentary. The Nikkei 225 advanced following softer PPI data and dovish comments from BoJ Board Member Noguchi. Hang Seng and Shanghai Comp. were up, with Hong Kong leading the way by breaching the 18K handle. Chinese banks were bolstered by reports of China's sovereign wealth fund increasing its stake in domestic banks for the first time since 2015.

The latest UK GDP data indicated a modest 0.2% monthly rebound in August, mainly due to the unwinding of one-off factors that impacted July's 0.6% decline, such as inclement weather and high strike activity. Services output increased by 0.4%, while construction and industrial production fell. The data suggests Q3 growth may come in below the Bank of England's forecast of a small output rise.

The September US CPI report is the significant release today, with expectations for headline inflation to remain at 3.7%, driven by a rise in gasoline prices. Core inflation is expected to have fallen further to 4.1% from 4.3% in July, reinforcing expectations that the US Federal Reserve will leave interest rates unchanged at its November 1st monetary policy update.

In the UK, the Bank of England will release the latest Credit Conditions and Bank Liabilities surveys, offering insights into the impact of recent interest rates on loan demand and supply. Central bank speakers are scheduled for the day, with some tied to the semi-annual IMF-World Bank conference in Marrakech. BoE Chief Economist Huw Pill will discuss the macroeconomic policy outlook on a panel, while several Fed policymakers in the US may provide immediate assessments of today's CPI data for interest rates. The European Central Bank will release minutes from last month's policy meeting, where interest rates were raised for the 10th consecutive time, and the ECB hinted that it might be the last increase.

FX Positioning & Sentiment

Before the CPI release, it's crucial for FX traders to take oil price movements into account, in late September, Brent crude oil was trading around $98 per barrel. However, just before the Israel-Hamas conflict, its price had dipped to $83.44. The conflict initially led to a moderate increase in oil prices, with Brent peaking at $89.00 on October 9 before settling around $85.41 right before the CPI data release. Since then, oil prices have retraced a substantial portion of their earlier gains, currently hovering in the middle of their expected range. The support for oil prices comes from factors such as U.S. demand for the Strategic Petroleum Reserve (SPR) and the psychological significance of the $100 per barrel threshold. Cheaper oil generally bolsters the currencies of import-dependent countries like the euro (EUR), Japanese yen (JPY), Indian rupee (INR), and Chinese yuan (CNY). In contrast, it tends to undermine the currencies of major oil-exporting nations, including the U.S. dollar (USD), Mexican peso (MXN), Canadian dollar (CAD), Norwegian krone (NOK), Russian ruble (RUB), and Indonesian rupiah (IDR).

CFTC Data As Of 3-10-23

EUR net spec long falls to 78,943 in week to Tues from 98,399
Smallest EUR long since October
JPY short increases to 113,988 contracts from 109,512
AUD short 81,987 versus 86,815 previous week
GBP flips to short 6,680 from long of 15,669
First sterling short since April
CHF short jumps to 16,742 -- biggest since November -- from 9,115. (Source Reuters)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0500 (1BLN), 1.0550 (1BLN), 1.0575 (1.3BLN)
1.0590-1.0610 (2.6BLN), 1.0640 (1BLN), 1.0700 (769M), 1.0750-55 (3BLN)
USD/CHF: 0.9035 (660M), 0.9125 (375M), 0.9150 (256M), 0.9200 (217M)
GBP/USD: 1.2100 (456M), 1.2130 (850M), 1.2250 (250M)
1.2290 (200M),1.2325 (200M), 1.2450-60 (489M)
EUR/GBP: 0.8560 (294M), 0.8580 (210M), 0.8600 (530M)
0.8650 (354M), 0.8730-35 (1.1BLN)
AUD/USD: 0.6425-30 (1BLN), 0.6440 (619M)
NZD/USD: 0.5900-15 (544M), 0.6100 (267M). EUR/SEK: 11.40 (200M)
USD/JPY: 148.00 (856M), 148.50 (320M), 148.75-80 (1BLN), 149.00 (1BLN)
149.50 (820M), 149.70 (300M),

Overnight Newswire Updates of Note

In September, Federal Reserve officials adopted a more cautious stance due to increasing economic uncertainty.
According to Federal Reserve's Collins, the full impact of the Fed's rate hike cycle has yet to be felt by the economy.
Collins suggests the central bank may need to consider further rate hikes if economic data warrants it.
The Fed's combination of quantitative tightening (QT) and interest rate hikes may be capping long-term yields rather than spurring them.
President Biden issued a warning to Iran regarding the Gaza situation, and Israel has established an emergency war cabinet.
The G7 finance chiefs may engage in discussions about the potential risks stemming from the Middle East conflict, as chaired by Japan.
Bank of Japan's Noguchi highlights that wage growth momentum is a significant focus for Japan's economy.
Japan's Ministry of Finance's Kanda acknowledges that the Israel-Hamas conflict is impacting the markets and they are prepared to respond to developments.
A poll reveals that most Japanese firms expect China's economic slowdown to persist until 2025.
The United States will participate in a Beijing defence forum, indicating improving diplomatic relations.
Reports indicate that China has barred brokerages from accepting new mainland clients for offshore trading.
Chinese stocks experienced gains following state funds increasing their stakes in the 'Big Four' banks.
An ECB policymaker argues that China should commit to yuan convertibility rules.
According to the Bank of England's Dhingra, only a portion of the impact of rate hikes, around 20% to 25%, has been transmitted to the economy.