Twilight zone
If the narrative on relative dollar weakness is to be believed, then USDJPY is shaping up for a test of the 118.30-50 zone that could potentially open a path first towards 116 and then even to 115, says the FX Option desk's Gustave Rieunier.
The 118.40 level is key, says Rieunier. "A close below that level could see dollar weakness test as far down as 115 with 115.50 and 116 on the route."
That's potentially good news for volatilities with one-month and one-year USDJPY both seemingly marooned at 84 and 8.7 respectively.
"Vols in USDJPY remain under pressure so buying options here could offer good reward but if USDJPY were to slip back to 119.50, then this would of course change it," says Rieunier.
USDJPY was at 118.680 at 0655 GMT.
Under pressure
The possible push by USDJPY below 118.40 highlights "a dollar that is under pressure until proven otherwise," says Saxo Bank's head of forex John J Hardy.
Hardy sees 1.0840 as a line in the sand for EURUSD which could propel the pair towards 1.10 if broken. EURUSD was at 1.07972 at 0655 GMT.
In general, risk-off appetite is helping bolster EUR somewhat ironically, given the Greek situation where it seems a bit of alarm doesn't exactly harm EUR's prospects but where a really nasty turn of events could pressure the common currency again.
China's rabbit
Meanwhile, the People's Bank of China pulled a rabbit from the hat Sunday by cutting the reserve requirement ratio 100 basis points to 18.5%, the biggest single cut since the global financial crisis begun in 2008.
It was a move that reflects "underlying weakness rather than a sign of impending strength," says Hardy, while the Singapore desk's Christoffer Moltke-Leth labelled the move "as more aggressive than the market had expected" and which was followed by the Chinese prime minister giving a speech Sunday that urged banks to be more proactive in lending.
Both NZD, and AUD in particular, were boosted on the cut with AUDUSD hitting an intra-session high of 78.40. Hardy expects both to enjoy some short-term momentum but "not to expect them to strengthen much beyond the near term."
Taking stock
From the Floor would have expected stock markets in China to fly after such an announcement but, after a quick spike by 2%, the move soon gave way as volatile markets took their time to assess what the move meant.
Despite that, Saxo Bank's head of equities Peter Garnry expects markets to rise not because it reflects some kind of strength in Chinese markets — it doesn't, he makes clear — but because it could help fuel credit growth.
"It could be positive for risk appetite as it could fuel credit growth which i already present in China," he says.
Garnry has a stark warning for the automobile sector, nevertheless, which is highly exposed to the Chinese market and which is now having to deal with a slowdown in sales.
"Take BMW, which gets 22% of its revenue from China," says Garnry. "The auto sector is really slowing down and of all the German car makers it is the most exposed. It is very sensitive."
And finally....
And last, but most definitely not least, Garnry expects another rollercoaster ride for the bank sector today after falls "across the board" on Friday, especially if Greece headlines come to dominate.
"Last Friday banks were hammered as fear spread first through the peripherals like Italy, Portugal, Spain and of course Greece to then hit some of the big German banks, seeing the likes of Deutsche Bank (XETRA:DBKGn) down 3.3%," he says. "Keep an eye on the banks today."