MNI US MARKETS ANALYSIS - USD Nearing Four-Month High

US TSYS SUMMARY: Weaker Ahead Of A Busy Schedule

Treasuries have traded weaker overnight Wednesday on average volumes, with multiple points of interest on the schedule including inflation data, 10Y supply, and FOMC members' commentary.

• Curve a little steeper: 2-Yr yield is up 0.2bps at 0.2405%, 5-Yr is up 1.6bps at 0.8422%, 10-Yr is up 1.9bps at 1.3675%, and 30-Yr is up 1.1bps at 2.0094%. Sep 10-Yr futures (TY) down 6.5/32 at 133-11 (L: 133-09.5 / H: 133-17).
• The focal point for the week comes at 0830ET with the release of July CPI data - expectations are for the headline and core readings to begin demonstrating that the surge in the past few months was indeed "transitory". We'll put out a preview including sell-side summaries shortly.
• Also highlighting the calendar is the $41B 10Y Note auction at 1300ET (there's also $30B 119-day CMB sale at 1130ET). NY Fed buys ~$2.025B of 22.5-30Y Tsys.
• KC Fed Pres George's appearance at the NABE conference at 1200ET is the Fed speaker highlight (first appearance since late May); we hear again from Atlanta's Bostic at 1030ET. Also potentially of note, NY Fed's Logan speaks on emergency lending at 0800ET.
• US Jul budget statement out at 1400ET too. Senate passed the $3.5T budget resolution around 0400ET along party lines as expected, setting up at least a month of legislative wrangling.

EGB/GILT SUMMARY: Reversing The Week's Gains

European government bonds have sold off this morning and curves have bear steepened alongside broad gains for equities and the USD.

• Gilts have drifted lower, continuing from yesterday afternoon's sell-off and unwinding gains from the beginning of the week. Cash yields are now 1-2bp higher on the day.
• Bund yields have similarly pushed up 1-2bp across much of the curve.
• BTPs have underperformed core EGBs with yields 2-5bp higher and the belly of the curve leading the charge.
• It is a similar story for OATs, which trade in line with bunds.
• Supply this morning came from the UK (Linker, GBP700mn), Germany (Bund, EUR3.316bn allotted) and Italy (BOTs, EUR7bn).
• The final German CPI print for July matched the initial estimate (3.1% Y/Y). Focus later today shifts to US CPI at 1330GMT.

EUROPE ISSUANCE UPDATE

Germany Allots E3.316bn of the 0% Aug-31 Bund, Average yield -0.44% (Prev. -0.30%), Buba cover 1.4x (Prev. 1.42x), bid-to-cover 1.2x (Prev. 1.2x)

UK DMO sells GBP700mln of the 0.125% Mar-39 Linker, Average yield -2.633% (Prev. -2.45%), bid-to-cover 2.27x

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU1 174.50 put, bought for 11 in 1.6k

DUU1 112.30/112.20/112.10p fly, sold at 2 in 1.5k

3RZ1 100.25p vs 0RZ1 100.50^, bought the 3yr for half in 4k

US:
TYU1 132.75/131.75ps, bought for 14 in 20k

Currency Markets Complacent Over QE Taper, According to Options

• This week, the cost of hedging against sharp swings across both EUR/USD and GBP/USD via 10-delta 6m butterflies has dropped to multi-decade lows (all-time lows in the case of EUR/USD). This reflects the now historically cheap premium of far OTM calls/puts across both currency pairs, possibly expressing the view that ample liquidity is here to stay and major central bank policy switches in the near-term are unlikely.
• This, however, is not reflected across other asset classes. The 6m Treasury MOVE Index (a proxy for implied US Treasury implied volatility over six months) has been grinding higher off the June lows and this week hit the best levels since April.
• Both the butterfly options and the MOVE Index capture the Fed's Jackson Hole Policy Symposium at end-August as well as two cycle of the Fed's SEP, meetings at which sell-side analysts have flagged for taper risk.
• This may be underpinning the rise in the MOVE index, but markets see little risk of currency volatility accompanying any taper in asset purchases.

FOREX: Dollar on the Up Pre-CPI

• The greenback is inching higher early Wednesday, gaining against most others in G10 to put the USD Index at the best level since early April. Further gains through 93.437 would put the dollar at it's strongest since November last year.
• AUD and GBP are offered, putting GBP/USD at the lowest levels of the month, but still well clear of nearest key support at the 1.3772 200-dma. USD/JPY is also clearing recent resistance thanks to the bouncing dollar, with the pair touching 110.80 and nearing next resistance at 110.97, the 76.4% Fibonacci retracement of the July - August pullback.
• Commodity-tied currencies are broadly flat, with some of the recent volatility across oil and precious metals markets ebbing lower this morning. This leaves the likes of USD/CAD, USD/NOK well within the week's range so far.
• Focus turns to US CPI data, with analysts expecting M/M CPI to drift to 0.5% from 0.9% previously. Nonetheless, Y/Y CPI is expected to remain above the Fed's target, at 5.3%. Fed speakers are also eyed, with Fed's Bostic, George and Logan on the docket.

FX OPTIONS: Expiries for Aug11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1700-15(E669mln), $1.1750(E557mln), $1.1795-00(E744mln)
• USD/JPY: Y108.65-70($715mln), Y109.85-90($1.4bln)
• EUR/GBP: Gbp0.8450(E655mln)

Price‌ ‌Signal‌ ‌Summary‌ ‌-‌ ‌EUR/GBP‌ ‌Cracks‌ ‌Key‌ ‌Support‌

• In FX, EURUSD extended lower still Tuesday, touching new monthly and weekly lows at 1.1710. This narrows the gap with key support at the 2021 low printed back in March at 1.1704. EURGBP showed below key support Friday, worsening the outlook which had already tilted bearish. Moving average studies remain in a bear mode highlighting a downside theme, with losses toward the 1.0% 10-dma envelope at 0.8435 now the focus. USDJPY initially extended lower mid-last week, but has rallied since, rising back above the 110.00 handle. This works against the previously bearish theme, with markets now focusing on the Jul 14 high at 110.70.
• Fragile and illiquid conditions in precious metals markets saw Gold prices spiral lower in early Asia-Pac trade Monday, with markets taking out all nearby support levels to print multi-month lows of $1690.6. The pull lower found some support at the 61.8% retracement of the 2020 range, but the recovery off the low will have emboldened bulls.
• S&P E-minis outlook is bullish as evidence of dip buying remains solid on intraday pullbacks. Recent gains have confirmed a resumption of the uptrend and signal scope for a continuation near-term. EUROSTOXX 50 futures continue to press onwards, extending the winning streak to six consecutive sessions of higher highs. This follows the break above previous resistance at 4101.50, Jul 1 high. The breach of this level places on hold the previously bearish outlook and instead signals scope for a stronger move higher.
• The winning streak in Bund futures concluded Friday, with bond markets globally edging lower. This ends the winning streak of 8 consecutive sessions of higher highs, although the outlook holds bullish. Any return higher targets 177.69, a Fibonacci extension.

EQUITIES: Europe Inches Higher, But US Indices Lag Pre-CPI

• Stock markets across Europe trade higher, with gains of between 0.1-0.5%, with UK's FTSE-100 and Spain's IBEX-35 outperforming slightly, while Germany's DAX trades with only minor gains of 0.1%.
• US futures are less positive, with the S&P and NASDAQ futures both sitting in minor negative territory as markets consolidate and range-trade ahead of the CPI figure later today.
• Europe's energy and financials sectors are leading the gains, countering the downside seen across tech and consumer discretionary sectors.

COMMODITIES: Oil Recovery Quashed as US Call on OPEC+ to Open Taps

• Oil benchmarks trade lower, working against the recovery off the week's lows in both WTI and Brent.
• Moves follow a report on CNBC, citing the White House's intention to call on OPEC and its allies to increase oil production as gas prices are on the up. The report goes on to say that OPEC+'s plans to gradually ease production curbs is "simply not enough".
• As a result, WTI shot through nearby support, printing a low of $67.04/bbl before stabilising somewhat.
• Trade in precious metals has been less eventful, with gold and silver inside recent ranges, but grinding higher despite general USD strength.