Citi

European Open

We saw markets hold mostly steady in a morning marked by Chinese data. USD and other G10 currencies held mostly steady, while AUD and NZD saw slight upticks. Crude oil traded down slightly, while S&P equity futures held flat. Asian equities also traded flat, with the exception of HSI, which saw a 1.16% gain. China held its Loan Prime Rates steady today, alongside expectations. We note however, that the overnight session saw CNH break below the key support level at 6.4250, trading down to 6.7300. The Asian session saw the pair tick back up to the 6.3900 level. JPY saw trade balance news come in slightly below expectations at JPY -622.8bn (vs consensus JPY -586.4bn), although this did not affect the overall price action. USDJPY traded higher to three year highs at around 114.55, just below the psychological barrier of 115.

In terms of data ahead, we sight CPI prints for GBP (07:00 BST) and CAD (13:30 BST). For the US, Looking forward, we look forward to Fedspeak from Bostic, Kashkari, Evans and Bullard on Racism and the Economy at 17:00 BST. The more notable event however, would be the latestBeige Book release at 19:00 BST. In Europe, we sight a few central bank speakers. We start with Norges Bank Governor Olsen (08:00 BST.), followed by ECB's Elderson (08:20 BST) and ECB’s Holzmann (14:40 BST). Riksbank’s Jansson will round up the speakers at 17:00 BST. In terms of the EM space, we will see ZAR CPI YoY (09:00 BST) and TWD export orders YoY (09:00 BST).

USD held steady on a quiet Asian morning. G10 currencies also traded in line with the USD, with none having significant moves. The Asian session also saw US equity futures relatively flat. This comes after a NY session that had seen some of the greenback’s strength being unwound.

Lastly we flag a holiday today for IDR.

JP Morgan

EUR: We finally got the delayed FX move yesterday that the scope of the rates move from Monday deserved, with the USD capitulating. The question in the rates space is whether the market has truly lost faith in central bank guidance or the market is closing up shop for the year after a painful trading environment. To me, it felt awfully like a position squeeze as steepeners and USD longs had been the favourite positions. Certainly we saw a decent amount of HF USD selling from many different names yesterday.

Interestingly we also saw RM JPY selling which supports the idea of position capitulation in that sector too as that community are long JPY. With a lot more now being priced into the front end of the curves, we have a very interesting setup for the next few weeks where I could see the USD going either way. If stocks can hold up (base case) and growth perks up (feels like we are at max negativity on growth and the supply story) to keep the back end yields supported AND the market doesn’t lose faith in the Fed’s order of monetary policy tightening, aka August 22 (supposed end of tapering) acts as a semi anchor for Fed pricing and the first hike then the USD could have a period of weakness, particularly against the commodity currencies like AUD and CAD.

But the market keeping faith in the Fed is the biggest risk there and not something I would feel comfortable hanging my hat on. Keeping an eye on Fed speakers. PMIs on Friday will go a long way to inform the growth side of the picture. Euro has been relatively well behaved to this point given the supposed weight of EURXXX short positioning but we need to see 1.17 hold above, otherwise we will have a bigger test of that positioning.