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Key options expiring today
Market prices tend to move towards the strike price at the time large vanilla options (ordinary put and call options) expire. It happens (all things equal) as each side of the deal seeks to hedge its risk exposure. This action is most noticeable ahead of 10 a.m. New York time when the majority of options expire (2 p.m. GMT).
Here are the key options expiring today:
• EUR/USD: $1.2250, $1.2300, $1.2350, $1.2400, $1.2450, $1.2500
• GBP/USD: $1.5400, $1.5450, $1.5500
• USD/JPY: 80.00
• EUR/GBP: 0.8045
• AUD/USD: $1.0150, $1.0200, $1.0250, $1.0265
European irony: French yields decline
There are always plenty of interesting things happening in the euro area these days. For example, the yields on 2-year French debt fell from the levels around 0.6% where they had been in the recent weeks to only 0.17% today.
As borrowing costs in troubled Spain and Italy went up again, France has become the main destination point of safe-haven flows. One may think that being a safe haven in Europe is Germany’s prerogative. However, German yields are already negative and if the situation continues this way, French ones will soon turn negative as well.
This means that despite the fact that France’s new president Francois Hollande is a socialist who favor spending, the nation is regarded as too big to fail. Spain and Italy, on the contrary, aren’t enjoying investors’ confidence no matter how much effort they show to reign in their fiscal problems.
Analysts: bullish on AUD/NZD
Strategists at RBC Capital Markets recommend going long on AUD/NZD at current levels, targeting at 1.33/1.35 in the next 1-3 month. On Monday AUD/NZD trades on the upside, remaining flat around 1.28. The pair trades above a 100-day MA and close to a 38.2% Fibonacci retracement from a May-June decline.
ANZ Research: The pair is to re-test the 1.30 level in coming months. A paring of Australian interest rate expectations against steady New Zealand rates should see support from the differential. Key NZ commodity prices such as those for dairy products appear set to weigh on the NZ dollar.
Resistance for AUD/NZD lies at 1.2815 (July 2 and June 20 maximums), 1.2832 (50-day MA) and 1.2855 (June 13 maximum and 50% Fibonacci retracement), while support - at 1.2760 (July 5 minimum) and at 1.2737 (July 2 minimum).
EUR/USD down ahead of ECOFIN
EUR/USD touched its lowest level in two years ($1.2255) early Monday ahead of the EU finance ministers meeting, but then bounced to $1.2290.
A two-day Eurogroup/ECOFIN Finance Ministers meeting (July 9-10) attracts the market attention. The policymakers are to discuss the details around the decisions from the EU Summit: on the top of the agenda is the Spain's and Cyprus' rescue. According to the EU diplomats, EU ministers will grant Spain one additional year, until 2014, to meet the 3% deficit target. Moreover, the new Greek Finance Minister will report on efforts to put the country's reform program back on track.
The post EU-summit optimism has been rather short lived as yields on Spain’s and Italy’s 10-year bonds exceeded the pre-summit levels (above 7%) on Monday. The Sentix Investor Confidence index dropped to a 3-year low, coming out below the expectations and adding to investors’ concerns.
Image: Michael Shue
Danske Bank: bullish on AUD/CAD
Analysts at Danske Bank are bullish on AUD/CAD in the medium term. The specialists think that the pair has bottomed out around 0.9955. In their view, if Aussie overcomes resistance in the $1.0455 zone (June 29 maximum), it will be able to rise to 1.0520 (19 March maximum), 1.0665 (28 October 2011 maximum) and then to 1.0785 – the bank recommends taking profits here. In the longer term, the bulls may push the pair to 1996 maximum at 1.1090.
Banks' forecasts for FX majors
Here are banks' forecasts for FX majors. Data were submitted on July 6.
Source: FX Week
Aspen Trading: recommendations for USD/CAD
Analysts at Aspen Trading Group recommend buying USD/CAD at C$1.0200, targeting at C$1.0600 and with a stop at C$0.9900.
According to specialists, the pair is expected to rally on a falling stock market and falling crude oil. Lately Canada has demonstrated weak manufacturing and labor market data. Most analysts don’t expect the BoC to raise interest rates in the nearest future on the back of recent disappointing data.
EUR's role as a funding currency grows
The single currency becomes more attractive as a funding currency for carry trade operations in the wake of the ECB rate cut on Thursday. The regulator lowered the borrowing rate to 0.75%, while the deposit rate – to zero, so in the nearest future investors are likely to use the euro as a “whipping boy” on the FX market.
Traditionally, investors chose the Australian and the New Zealand dollar to benefit from higher interest rates offered there. However, these days some speculators switch attention to the Hungarian forint, the Polish zloty and the South African rand. Hungary's 10-year bonds, for example, bring nearly 8% compared to just 3.1% in Australia. AUD and NZD, however, remain the most reliable currencies for carry-trade operations: emerging European currencies are less liquid and much riskier.
No matter which currency investors choose for their assets, euro will be the loser anyway as the market players will borrow in euro to invest elsewhere. This is a significant bearish factor for EUR.
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