Markets overview; modest although divergence and carry play’s - BMO

By | Updated July 30, 2014 AAA

FXStreet (Guatemala) - Stephen Gallo, European Head of Currency Strategy at BMO Capital explained that although the moves during the London morning were very modest, divergence and ‘carry-related’ plays did figure prominently into the mix.

Key Quotes:

"Weakness in EUR/GBP following somewhat better UK data appeared to soften the EUR across the board, while more weakness in EUR/JPY knocked the JPY crosses lower."

"Although the EUR did underperform the USD and the GBP vs. the JPY, the softness in the JPY crosses was rather broad based. G10 opportunities for positive carry are still very limited in the post-crisis world, and that is a net positive for the JPY. Otherwise, PBoC’s shift to a much weaker CNY fix overnight probably slowed some of the EUR’s declines down."

"USD/CAD once again displayed a relatively soft tone throughout the London morning, and once again we’ve had to blame EUR/CAD weakness. Nevertheless, USD/CAD’s divergence with key rate differentials is still fairly wide with spot hovering just below 1.0900. With the market modestly less short of CAD now than it was on Friday, this divergence will leave USD/CAD vulnerable to topside risk around the US retail trade data and the BoC’s FSR press conference tomorrow."

"Today was the first actual test of 1.0890 support in USDCAD this week, so the risk that a further liquidation of EURCAD longs boosts the general bid in the CAD is not a low one. However, upside in US yields is still surpassing upside in CAD yields, and we expect that to persist leading into tomorrow’s data at the very least. We therefore would still not be looking to be long of CAD below 1.0890."

"PBoC fixed the CNY mid-point at 6.1506, which was a 55 pip increase on yesterday’s level. This move in the fix was sharply above our own expectation (+14 pips) and the general consensus in the market by about 40 pips."

"USD/CNH was well bid during the entire session. But if PBoC’s intention today was to keep implied vols climbing, the session was not generally a success."

"USD/CNH 1yr implied ATM vol traded less than 3.00 at the start of the London session, having finished yesterday at 3.15. After seeing today’s market activity, we suspect that the rest of June is going to bring more erratic movements in the fix so that PBoC can accomplish one goal of keeping speculators guessing. Relative to market expectations, we would not be surprised to see big deviations in the fix in both directions in the coming weeks."

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