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Friday 7 August 2015

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 NEWS

Europe Roundup: Dollar stable, sterling weaker ahead of US jobs data - August 7th, 2015

07 August 2015, 14:17

• China growth probably half reported rate or less say sceptics.
• China central bank to increase focus on keeping monetary policy appropriately tight.
• Australia shares fall 2.4%, most in more than 3 years.
• BOJ leaves policy/economic assessment as is, vote 8-1.
• BOJ Kiuchi again dissents.
• BOJ JGB buy taper to Y45 tn/yr, inflation around zero for now on energy.
• Japan FinMin Aso - IMF adoption of CNY to SDR desirable but should be based on objective data.
• Swiss July Unemployment rate unadjusted 3.1% vs 3.1% previous.
• Swiss July Unemployment rate adjusted 3.3% vs 3.3% previous, 3.3% expected.
• Swiss Forex reserves rose for the first time in 4 months in July.
• German June Industrial output -1.4%M/m vs 0.0% previous, 0.3% expected.
• German June Trade balance E24.0bn vs E22.8bn previous, E21.5bn expected.
• Greek PM says country cannot handle migrant inflows.
• Greek prices fall for 29th month.
• UK June Goods trade balance non-EU £-1.62bn vs £-1.57bn previous, £-2.4bn expected.
• UK June Goods trade balance £-9.184bn vs £-8.0000bn previous, -9.3bn expected.
• BOE's Broadbent- No urgency to raise rates.

Economic Data Ahead              

• (0830 ET/1230 GMT) US July non-farm payrolls, +223k eyed; last +223k.
• (0830 ET/1230 GMT) US July unemployment, 5.3% eyed; last 5.3%, participation 62.6%.
• (0830 ET/1230 GMT) US July average earnings, +0.2% m/m eyed; last unchanged.
• (0830 ET/1230 GMT) US Average work week Jul, consensus 34.5 hours, previous 34.5 hours.
• (0830 ET/1230 GMT) Canada Building permits June, consensus 5.0%m/m, previous -14.5%.
• (0830 ET/1230 GMT) Canada Employment change July, consensus 5.0k, previous -6.4k.
• (0830 ET/1230 GMT) Canada Unemployment rate July, consensus 6.8%, previous 6.8%.
• (0830 ET/1230 GMT) Canada Participation rate July, consensus 65.8%, previous 65.8%.
• (0900 ET/1300 GMT) Mexico's 12-month inflation figure.
• (1000 ET/1400 GMT) Canada Ivey PMI SA July, consensus 52.0, previous 55.9.
• (1300 ET/1700 GMT) US June Dallas Fed trimmed mean PCE; last +2.3%.
• (1500 ET/1900 GMT) US June consumer credit, $17.0 bln eyed; last $16.09 bln.

Key Events Ahead

• (0745 ET/1145 GMT) Fed Trade operation 30-year Fannie Mae / Freddie Mac, max $1.525bn.

FX Recap
USD: Major currencies are stable on Friday; the dollar fell 0.1 percent to $1.0935 against the euro but was roughly steady at 97.791 against a basket of currencies. It stood little changed at 124.80 yen following a retreat overnight caused by position adjustments before the payrolls release.

EUR/USD is supported above 1.0900 levels and currently trading at 1.0920 levels. It has made intraday high at 1.0948 and low at 1.0905 levels. Industrial output in Germany posted 1.4% negative growth in June after reporting a flat growth in the preceding month, according to details. Market had expected 0.3% growth. The pair keeps the weekly range below the 1.1000 handle, against a backdrop of a cautious tone from investors in light of relevant releases in the US economy and ahead of the critical Non-farm Payrolls due later today. Investors got an insight into Friday's non-farm payrolls report overnight with the release of the Automatic Data Processing (ADP) employment figures, which showed 185,000 job gains for July, missing the expected gain of 216,000. US ISM non manufacturing PMI data released with positive numbers at 60.3 mm vs 56.0 previous release. Initial support is seen around at 1.0789 and resistance at 1.1195 levels. Option expiries are at 1.0700 (1.7BLN), 1.0750 (714M), 1.0775 (734M), 1.0800 (1.8BLN), 1.0850 (571M), 1.0900 (523M), 1.0925 (2.2BLN), 1.10 (1.8BLN), 1.1125 (582M).

USD/JPY is supported above 124.00 levels and posted a high of 124.84 levels. It has made intraday low at 124.65 and currently trading at 124.70 levels. The Bank of Japan has kept policy settings unchanged since October when the central bank last expanded its Qualitative and Quantitative Easing program, which currently has the monetary base expanding at a rate of around ¥80 trillion per year. The latest inflation figures show Japan's core CPI rising only 0.1% year-on-year in June, and Tokyo's more timely inflation index sliding 0.1% in July. On Friday the bank said inflation is likely to remain at current levels for the time being, while the bank's most recent economic forecasts - given on July 15 - have inflation coming close to the 2% target by fiscal 2016. Initial resistance is seen at 125.68 and support is seen at 120.63 levels. Option expiries are at 123.00 (478M), 123.50 (395M), 125.00 (1.4BLN), 125.75 (800M).

GBP/USD is supported above $1.5500 levels. It made an intraday high at 1.5528 and low at 1.5487 levels. Pair is currently trading at 1.5514 levels. Sterling inched lower another 0.1 percent against the dollar and a quarter of a percent against the euro on Friday. Yesterday BOE kept the interest rate and asset purchase facility unchanged as expected. Pair was sold-off on the back of BOE Broadbent's dovish comments relating to the central bank rate-hike outlook and also on widening UK trade deficit news. Moreover, BOE coming out surprisingly dovish with its minutes and revising lower its inflation outlook on Thursday also keep the negative sentiment around the pound intact. Initial support is seen at 1.5413 and resistance is seen around 1.5734 levels. Option expiries are at 1.5450 (431M), 1.5500 (400M).

NZDUSD is supported below 0.6600 levels and trading at 0.6560 levels and made intraday low at 0.6528 and high at 0.6567levels. The kiwi recovered from its six-year lows seen in the previous session, when it was flattened by weak New Zealand jobs figures and the strongest US ISM data since 2005. Pair trades almost unchanged, swiftly recovering from a dip to session lows following the Fonterra's payout forecast cut and also the farm support plan announcement. Fonterra announced, "Farmgate milk price forecast has been reduced from $5.25 kgms to $3.85 per kgms. Co-operative has announced $4.25 - $4.35 forecast total available for payout for 2015/16. It has reduced its New Zealand milk volume forecast for 2015/16 season to 1,589 million kgms, 2 per cent lower than the previous season". Moreover, the dairy giant also announced the new measures to support the dairy industry, a Co-operative Support Program of an additional 50 cents per share-up kilogram of milk solids to support farmers this season. However, the upside remains capped on the back of a broadly higher US dollar ahead of the key US NFP data due later in the US session. Initial support is seen at 0.6465 and resistance at 0.6789 levels.

USDCHF is supported above 0.9800 levels and currently trading at 0.9832 levels. Pair made in intraday high at 0.9839 and low at 0.9800. The Swiss currency was persistent sold-off versus the US dollar, pushing USD/CHF to fresh four-month highs beyond 0.98 handle, as markets continue to favour the US dollar ahead of a key US jobs reports. Swiss CPI figures which revealed that consumer prices in Switzerland failed to rebound in July and slid into negative territory on a monthly basis as well. Today Switzerland released unemployment rate with stable numbers at 3.3% mm. To the topside, the next resistance is located at 0.9850 levels and to the downside, immediate support might be located at 0.9769 (Today's Low) levels and below that at 0.9700 levels.

AUD/USD is supported below 0.7400 levels and trading at 0.7381 levels. It has made intraday high at 0.7385 levels and low at 0.7340 levels. The Australian dollar lifted against the greenback on Friday after the Reserve Bank of Australia released its quarterly Statement on Monetary Policy, which contained confirmation that the bank was happier with the recent depreciation of the Australian currency. The RBA's quarterly Statement on Monetary Policy noted that "there are increasing signs that the depreciation of the exchange rate is providing additional support to demand for domestically produced goods and services, which should in time lead to more investment." Initial support is seen at 0.7225 and resistance at 0.7647 levels. Option expiries are at 0.7300 (401M), 0.7350 (666M), 0.7450 (591M).
Equities Roundup
Investors were on sidelines on Friday, with the dollar and world stocks markets barely budging, ahead of U.S. payroll data- a key to convincing the Federal Reserve to hike interest rates for the first time in nearly a decade.

In Europe, stocks edged 0.5 pct lower after the data showed German exports and industrial output fell in June. Europe's FTSEurofirst 300 was down 0.1 pct to 1,587.87 points in early deals, Britain's FTSE 100 fell 0.2 pct, France's CAC 40 inched down 0.2 pct and Germany's DAX edged lower 0.3 pct.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 pct and set for its third straight weekly loss. The MSCI world index has advanced 3 pct this year and the MSCI emerging markets index has fallen more than 6.5 pct, as investors have switched their holdings. Shanghai Composite Index ended up 2.3 pct at 3,744.20 points, while the CSI300 Index closed up 2.0 pct at 3,906.94 points.
Commodities Recap
Oil futures clawed back some losses on Friday after setting multi-month lows in the previous session, but remained on track to close the week more than 4 percent lower. Brent crude futures were 40 cents higher at $49.92 at 0847 GMT, after reaching a 6-month low in the previous session. U.S. crude was 35 cents higher at $45.01 a barrel at 0847 GMT, after dropping more than 1 percent on Thursday when it hit a 4-1/2 month low.
Gold rose on Friday as the dollar softened, but was on track for a seventh straight weekly fall, as the market awaits for U.S. non-farm payrolls data. Spot gold rose up 0.3 pct at $1,091.86 an ounce at 0914 GMT. U.S. gold for December delivery gained 0.2 percent to $1,092.30 an ounce.
Treasuries Recap
U.S. Treasuries were broadly unchanged as dealers squared positions before the economic data with benchmark 10-year notes yielding 2.24 pct. Top-rated German bond yields were flat at 0.72 percent.

JGB prices ended the day steady to slightly higher, sending yields down by 0.5bp to 1bp on the day in the 7-yr and longer zone.

JGBs opened modestly firmer on a fall in US TSY yields and stock prices overnight, and then trimmed most of their earlier gains into the morning close before the BoJ decision. Japanese 10-year bonds were trading on top of the day's ranges at 0.43 percent.The BoJ announced that its policy board decided by an 8-1 majority vote to maintain its current monetary policy.

New Zealand government bond yields were 3.5 basis points lower. Australian government bond futures eased in the wake of the RBA statement. The 3-year bond contract eased 3 ticks to 97.990, while the 10-year contract lost 2 ticks to 97.1200.

FxWirePro: Option arbitrage for EUR/GBP as NPV of ATM calls indicates overpriced premiums

07 August 2015, 14:15

The near month volatility of ATM contracts of this the pair is at 9.15.

Vols of 14D at the money calls - 8.90%

NPV of this call - 468.04 while Premiums trading above 14.36% at GBP 535.26 for lot size 100,000 units.

Hence, comparing this call premium with volatility we think the hedging cost would not be economical as result of deploying ATM instruments.

But we cannot afford to get stuck in this riddle without hedging, so what's the alternative, here comes the strategy arbitrage strategy in which options trading that can be performed for a riskless profit as EURGBP ATM call options are overpriced relative to the underlying exchange rate of EURGBP.

To perform this conversion, the hedger holds the underlying spot FX and offset it with an equivalent synthetic short spot FX (long put + short call) position. Profit is locked in immediately when the conversion is done, the profit would be strike price of call/put - purchase price of underlying + call premium - put premium.