The Week in Focus: July 3 – 7 Outlook

July 3, 2017 (Commerzbank AG) – FX options market in the doldrums

The FX options market is experiencing the summer doldrums even though EUR/USD has moved sharply upwards in recent days. Exchange rate options are trading on the basis of their lowest implied volatility since 2014. In our view, FX volatility will only show any sustained pickup once inflation expectations rise and central bank monetary policy switches away from its current passive setting.

Falling oil prices: OPEC’s strategy put to the test

Oil is now as cheap as it was before production cuts started in November 2016. Prices could fall even more in the short term if the markets decide to test the resolve of OPEC and the US shale oil industry. But with demand in Q3 likely to exceed supply, prices should pick up again. We maintain our year-end Brent forecast of $48 per barrel

Outlook for the week of 3 to 7 July 2017

  • Economic data: US employment in June looks set to have risen visibly after the May calendar effects unwind, although payroll gains are likely to slow due to demographic reasons over the medium-term.
  • Bond market: Markets are likely to remain jumpy following the latest volatility tantrum in euro benchmark rates and a raft of big US data releases. We believe 10y Bund yields will test the upper boundary of a sideways range centred on 0.5% with risks skewed for a break to the upside
  • FX market: The euro is gaining sharply in the wake of an unintentionally hawkish speech by ECB President Mario Draghi. But the EUR-USD exchange rate is also supported by a Fed which appears to have recently become rather cautious.
  • Equity market: Germany should see ongoing M&A activity in the coming months, supported in part by the positive equity market trend.
  • Commodity market: With US output rising again, oil prices seem set to fall next week. Gold could show further weakness next week and weak US car sales may trigger the price correction we are expecting for palladium.

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