The EUR/USD has risen above 1.1000, easing some market pressure related to risk. Both the AUD and NZD have rebounded by over 30 points from their lows, while the euro shows strong performance.
The daily CNY reference rate is expected soon, with anticipations that the PBOC will maintain its current stance. The market expects another notable decrease in the USD/CNY reference rate, with the PBOC forecasted to set it at 7.3348, according to Reuters.
Euro Sentiment Shift
As the EUR/USD breaks through the 1.1000 level, it marks a clear shift in near-term sentiment and suggests that some recent concerns linked to risk appetite may be receding. This rise in the euro against the dollar suggests more than just a technical move — it reflects underlying support stemming from several macroeconomic factors. For participants in the market, particularly those positioning in short-dated options or looking to express a view on rate differentials through futures, the breach invites reconsideration of prevailing bias.
Meanwhile, movements in the Australian and New Zealand dollars by around 30 pips from their session lows are not merely reactions to a weaker US dollar. The firmer tone in both risk-sensitive assets may be tied to anticipatory positioning ahead of key data out of China. The anticipation around the People’s Bank of China (PBOC)’s response continues to guide broader Asia-Pacific sentiment, often setting the tone during thin overnight sessions.
The attention now turns to Beijing’s upcoming daily reference rate for the yuan. According to Reuters, expectations are coalescing around a fixing near 7.3348. This would represent yet another guided decline in the USD/CNY level, interpreted by us as an effort by the PBOC to sustain currency stability without fuelling bouts of offshore speculation. A stronger yuan, even slightly so, could feed into carry strategies and dampen dollar buying pressure, especially in pairs that are more sensitive to Chinese demand.
From our perspective, there’s been a notable pick-up in delta positioning along select crosses, specifically EUR/USD and AUD/USD. If the PBOC sets the mid-point below market estimates, we may see continued easing in regional dollar demand. This direction would further reinforce euro strength, with portfolio hedgers adjusting longer-duration exposure accordingly. Traders active in derivatives linked to short-term interest rates may want to observe moves in basis swaps or consider whether the dislocation is offering temporary arbitrage.
Shifts In Interest Rate Expectations
Further, recent comments from Powell—whilst not overly hawkish—have led to a reassessment of peak rate expectations. Though not immediate, the shifting trajectory implied in bond yields suggests less conviction behind further hikes, introducing two-way risks around carry trades. Lagarde’s position, interpreted by market participants as focused on ensuring inflation expectations do not drift, adds another element supporting euro resilience.
We’ve noticed that implied volatilities on major currency pairs have reset lower, a possible signal that positioning is now more balanced or uncertain. However, the broader macro backdrop, particularly in relation to China’s policy projection and US economic data surprises, still carries weight. Monitoring gamma positioning may offer clues if a directional bias begins to reform.
Therefore, when we discuss how to position around this, the flow in options markets—and the responsiveness to daily yuan fixings—should not be ignored. The data out of China in the next few days will either confirm or challenge the early-week bounce in AUD and NZD. In terms of strategy, it pays now to be more time-specific with entries, especially given that forward curves in the FX space have thinned.
With the immediate spike in the euro and regional pairings showing improved footing, derivative strategies should now account for a less compressed volatility environment and potential mean reversion across several popular dollar crosses. It helps to be nimble this week.
