Synopsis:

ING discusses the subdued state of FX markets due to low volatility and a modest recovery in global equity markets. They highlight the impact of US earnings releases, particularly from major tech stocks, on the next leg of the equity rally and how this relates to FX dynamics, especially the carry trade.

Key Points:

1. Low Volatility in FX Markets:

   • Dry Spell for Macro and Central Bank Calendars: A lack of significant macroeconomic events and central bank meetings is contributing to low FX volatility.
   • Global Equity Recovery: A modest recovery in global equity markets is helping maintain low volatility.

2. US Earnings Releases:

   • Tech Stocks Reporting: Investors are keenly watching earnings reports from major tech companies, which are expected to drive the next phase of the equity rally. Positive earnings results could further support the equity market.
   • Impact on Total Returns: The "Magnificent Seven" tech stocks have lost close to 8% this month, and tonight’s earnings results will be crucial in determining if the rally resumes.

3. Implications for FX Markets:

   • Carry Trade Dynamics: Low volatility and higher US equity markets typically support the carry trade. However, high dollar deposit rates (5.38% for one-week money) make the dollar an expensive funding currency.
   • Role of the Bank of Japan: There is significant pressure on the Bank of Japan (BoJ) to deliver a rate hike and reduce Japanese government bond purchases on 31 July. Failure to do so could result in USD/JPY floating higher again.

Conclusion:

While low volatility and equity recovery support the carry trade, the high cost of shorting the dollar complicates the scenario. The upcoming BoJ meeting will be crucial; a lack of significant policy moves could see USD/JPY rise further. The US tech earnings releases will also play a pivotal role in shaping market sentiment and FX dynamics in the near term.