ON
SHORT GBPUSD: CENTRAL BANK EXPECTATIONS - BOE/ ECB/ BOJ & FOMCReuters Analyst Expectations:
FOMC
1. IMPROVING DATA POINT TO SEPTEMBER RATE HIKE -
- The Fed is very unlikely to spring any surprises at the upcoming FOMC meeting, which concludes next Wednesday 27th July, but a September rate hike is a distinct possibility. The statement next week should acknowledge the apparent pick-up in second-quarter GDP growth, particularly the recent strength of consumption, and also the rebound in employment growth in June. The Fed won't commit itself to a September rate hike at the July meeting, however, hints will be eyed closely.
- Currently the 30 day federal funds rate option implied probability is consistant with the increasing chances of a September/ Novemeber hike view as the probability continues to increase to new post brexit highs e.g. 25bps FOMC hike probability for Sept/ Nov/ Dec increased to 24.6%, 25.7%, 41.6% from 18.8%, 20.2% and 39.5% yesterday. With Dec now pricing 2 hikes at 9.1% up from 7.1% - as risk markets continue to set new highs increasing confidence.
BOE
1. BOE SEEN CUTTING BANK RATE 25 BPS TO 0.25% IN AUGUST
- BoE Seen Restarting QE In August, Top Up With GBP80Bln adding to GBP375bn
- Median 60% Chance Of UK Recession In The Coming Year
- UK Economy Seen Growing 1.4% In 2016, 0.6% In 2017 (Prev Seen 1.9%, 2.1%)
- Short Sterling constant 3m Libor Option Implied cut probabilities remained flat on the day at 30% chance of a 25bps cut - however risk markets rally buoy hawkish expectations though this is fundamentally expected to impact the BOE decision since markets are rallying as a function of the BOE cutting (its a loop that the BOE will be aware of).
ECB/ BOJ
1. ECB not seen to cut rates but some analysts think there may be an extension to the maturity of ECB's APP e.g. further into 2017, though the purchase amounts is not expected to change at EUR80bln a month - nonetheless a 3m extension is an extra EUR240bn and a 6m is EUR480bn, so such an announcement on Thursday would certainly continue to fuel the rally in risk markets.
2. BOJ - there is less consensus on the BOJ meeting on the 28th, though the forecasts seem to sit between a 10-20bps cut to the key rate + an extension to the ETF purchases (Maturity and monthly purchase amounts) + an extension to the JGB purchases (maturity and monthly purchase amounts) - a BOJ surprise to the upside would undoubtably enable risk markets to continue to rally, though if it goes the other way (Kuroda underdelivers) this could be the impetus to stop the risk rally in its tracks.
Trading Strategy:
1. Short GBPUSD on Pullbacks to 1.33/4 (if we see any now - unlikely but possible if retail sales outperform and the market prices the strong CPI/Employment at the same time) - 1.305TP1 1.285TP2 1.25xxTP3.
- I posted this trade a few days ago when the short price was favourable - at these levels i DO NOT advise shorting. 1.33 is the minimum entry - I just posted this as a short confirmation/ central bank watch post.
2. The above supports the short GBPUSD play as 1) Easing from ECB/ BOJ puts pressure on the BOE to ease (as the GBP appreciates against the JPY/ EUR in this situation which is deflationairy) thus BOJ/ ECB easing increases the already consensus view that the BOE will ease - a BOE easing of 25bps cut and 80bn extension to the QE would certainly move us through 1.25. Infact I believe the 25bps cut alone is enough to do that. If BOE delivers £80bn in QE then that will move GBP even lower to perhaps 1.20/23.
- Further, on the FOMC stance, a more hawkish FED strengthens the long dollar leg of the short GBPUSD which compounds the momentum that GBPUSD can move lower as we move towards two drivers vs just the one with the BOE easing. We now have BOE easing potential combined with ever increasing FOMC hike expectations fuelling USD demand which in turn/ combined will send GBP$ lower faster.
USDJPY: BUY THE 107 BREAKOUT - RISK-ON TO CONTINUE - BOJ/ BOEUSDJPY:
1 . Been watching $yen closely as my top 2 trades this week (along with GU). As expected/ foretasted 107 was the next key risk sentiment resistance level after 104 and after buying the 104 breakout i have confidence/ advise buying the 107 breakout - we have now crossed the 3m moving average at 106 which provides support/ confirms bullish move.
2 Risk has been depressed excessively in the past 6-months but more so directly after brexit - this risk rally (SP highs etc and UJ higher) isn't a fundamental change in risk sentiment imo (e.g. i dont forecast an UJ uptrend now) however i do believe this is a 2-4wk risk recovery before moving lower again back through the 104 level to the 102.
3. This risk recovery is being fueled by 1) JPY/ BOJ Stimulus hopes since the BOJ hasnt cut its rate since January the market expects strong easing from JPY Govt and BOJ. 2) Markets expect a 25bps cut in the Bank Rate and GBP80bn extension in BOE QE. 3) Several other CBs e.g. RBA/ RBNZ/ PBOC/ ECB are also expected to ease at some-point in 2016 so all speculations are being priced into this risk rally as upside. 4) As mentioned above, risk was depressed for several weeks into/ out of brexit so this is a recovery leg higher e.g. shorts profit taking/ washed out.
Volatility:
1. Current 25 delta Risk Reversals RR trade negative at -1.7, indicating either 1) the market is long Spot UJ but covering the downside possibility with options or 2) Option speculators like their chances with UJ lower - given the bullish bias id like to think the first is true. 2wk RR covering the BOJ however surprisingly trade close to flat at -0.3 - i see this as the market really not knowing what to expect/ sitting on the fence. Usually we see a strong bias to put's or call's but given BOJ/ Kurodas history (under-delivery) but also the current situation it makes sense why the market is flat with positioning.
1. IV 1wk and 2wk is: 11.41% and 19.27% and realised is: 6.35% and 13.16% - IV outperforming HV is a bearish signal but given the way markets have been rallying it is unsurprising that demand has increased (i dont see this as a bearish sign). Notably we see a spiking of 2wk IV at 19.27 vs 13.16HV which covers the BOJ meeting, thus clearly there is alot of anticipation going into the meeting.. i expect 28th vol to increase as we get closer to the event which could cause UJ selling however, BOJ expectations will outweight this (e.g. if 20bps + QE is expected we will see UJ upside).
Trading Strategy:
1. Buy USDJPY 107 break-out - should be 100pip+ squeeze as shorts are washed out as clearly there are alot of sellers in the market here who will have stops above the big fig (wait for confirmation e.g. high time frame close above 107.) 109TP1, 111TP2
- I don't see USDJPY breaking the pre-brexit recovery rally highs at 112 - if it we were to, this could perhaps signal a true shift in risk sentiment (e.g. market is now fully risk on).
- Late now but as initially mentioned this trade combined with the short GU worked well at hedging the risk-on risk-off dynamics at play (see attached) - still if GU retestes 1.33/4 shorts are strong at this level.
2. Assuming my initial assumption is correct e.g. <112 is the terminal rate for this recovery rally, I will then turn net seller of USDJPY and sell to 107TP1 104TP2 100.5TP3 but I will post about that nearer the time.
3. On a side note, if we were not to break 107 (unlikely as safe havens are taking heavy losses and stocks continue to make new highs) this level could be the risk sentiment pivot, but i would update if that becomes the case. If we do not break 107 today, it should be tomorrow as thursday is the traditional risk-on day.
Risks to the view:
1. Obvious risk to the view is that 1) JPY/ BOJ easing expectations wane which cause the bull rally to fade - something which is highly possible but more and more unlikely as we get closer (only 8 days away). 2) An unforeseeable risk-o
AUDUSD NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Put / Open Interest Put / Level
0 / 2 / 0.59000
0 / 20 / 0.61000
0 / 2 / 0.62500
0 / 25 / 0.63000
0 / 1003 / 0.63500
0 / 129 / 0.64000
0 / 2 / 0.64500
0 / 87 / 0.65000
0 / 24 / 0.65500
0 / 22 / 0.66000
0 / 46 / 0.66500
0 / 59 / 0.66995
0 / 42 / 0.67495
0 / 178 / 0.67990
0 / 155 / 0.68490
0 / 130 / 0.68985
0 / 134 / 0.69480
0 / 576 / 0.69975
1 / 194 / 0.70465
10 / 1258 / 0.70950
73 / 522 / 0.71430
49 / 721 / 0.71900
42 / 745 / 0.72350
120 / 901 / 0.72780
64 / 732 / 0.73180
58 / 606 / 0.73550
122 / 1519 / 0.73890
47 / 739 / 0.74170
13 / 284 / 0.74400
1 / 209 / 0.74570
0 / 41 / 0.74700
0 / 24 / 0.74790
0 / 20 / 0.74850
Volume Call / Open interest Call / Level
0 / 10 / 0.74950
0 / 3 / 0.74960
0 / 32 / 0.74980
0 / 143 / 0.75000
0 / 194 / 0.75030
0 / 103 / 0.75080
0 / 141 / 0.75150
0 / 181 / 0.75250
0 / 280 / 0.75380
24 / 1413 / 0.75540
37 / 404 / 0.75760
215 / 886 / 0.76030
7 / 750 / 0.76360
213 / 847 / 0.76730
13 / 718 / 0.77140
51 / 873 / 0.77580
110 / 575 / 0.78050
55 / 385 / 0.78530
20 / 644 / 0.79020
0 / 277 / 0.79515
1 / 106 / 0.80010
5 / 64 / 0.80510
4 / 38 / 0.81005
0 / 78 / 0.81505
0 / 2 / 0.82005
0 / 7 / 0.82500
0 / 3 / 0.83000
0 / 11 / 0.83500
0 / 25 / 0.84000
EURUSD NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Call / Open interest Call / Level
0 / 2 / 1.10470
0 / 11 / 1.10610
0 / 123 / 1.10690
7 / 75 / 1.10800
28 / 86 / 1.10950
193 / 467 / 1.11120
455 / 1497 / 1.11340
570 / 1126 / 1.11610
853 / 2190 / 1.11930
478 / 3761 / 1.12300
420 / 3248 / 1.12700
888 / 3497 / 1.13140
344 / 2766 / 1.13600
68 / 3305 / 1.14070
5 / 2226 / 1.14545
154 / 2994 / 1.15035
81 / 799 / 1.15525
13 / 1150 / 1.16020
35 / 572 / 1.16515
37 / 810 / 1.17015
10 / 694 / 1.17515
1 / 795 / 1.18010
0 / 659 / 1.18510
0 / 579 / 1.19010
0 / 259 / 1.19505
0 / 163 / 1.20005
0 / 102 / 1.20505
1 / 942 / 1.21000
1 / 448 / 1.21500
0 / 266 / 1.22000
0 / 134 / 1.22500
0 / 96 / 1.23000
0 / 43 / 1.23500
0 / 1 / 1.24000
0 / 10 / 1.24500
0 / 10 / 1.25000
0 / 250 / 1.25500
0 / 25 / 1.26000
0 / 62 / 1.30000
Volume Call / Open interest Call / Level
0 / 123 / 1.10690
193 / 467 / 1.11120
455 / 1497 / 1.11340
570 / 1126 / 1.11610
853 / 2190 / 1.11930
478 / 3761 / 1.12300
420 / 3248 / 1.12700
888 / 3497 / 1.13140
344 / 2766 / 1.13600
68 / 3305 / 1.14070
5 / 2226 / 1.14545
154 / 2994 / 1.15035
81 / 799 / 1.15525
13 / 1150 / 1.16020
35 / 572 / 1.16515
37 / 810 / 1.17015
10 / 694 / 1.17515
1 / 795 / 1.18010
0 / 659 / 1.18510
0 / 579 / 1.19010
0 / 259 / 1.19505
0 / 163 / 1.20005
0 / 102 / 1.20505
1 / 942 / 1.21000
1 / 448 / 1.21500
0 / 266 / 1.22000
0 / 134 / 1.22500
0 / 250 / 1.25500
GBPUSD NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Call / Open interest Call / Level
12 / 630 / 1.32000
79 / 1200 / 1.32170
0 / 449 / 1.32360
0 / 519 / 1.32570
29 / 1073 / 1.32810
29 / 395 / 1.33060
29 / 1325 / 1.33340
15 / 961 / 1.33640
345 / 710 / 1.33960
184 / 464 / 1.34300
195 / 1910 / 1.34670
146 / 348 / 1.35060
136 / 1395 / 1.35460
174 / 390 / 1.35880
126 / 1216 / 1.36310
35 / 806 / 1.36750
5 / 472 / 1.37210
52 / 303 / 1.37670
188 / 335 / 1.38140
29 / 904 / 1.38620
452 / 457 / 1.40070
14 / 263 / 1.40560
109 / 266 / 1.41060
23 / 345 / 1.41550
0 / 245 / 1.44030
0 / 277 / 1.45020
0 / 242 / 1.48010
153 / 371 / 1.49010
0 / 335 / 1.49500
0 / 263 / 1.50000
0 / 205 / 1.51000
0 / 225 / 1.52000
0 / 213 / 1.54000
Volume Put / Open Interest Put / Level
0 / 222 / 1.15000
0 / 387 / 1.16000
0 / 341 / 1.22420
0 / 588 / 1.23380
9 / 202 / 1.23850
19 / 266 / 1.24320
40 / 528 / 1.24770
143 / 930 / 1.25660
14 / 822 / 1.26080
147 / 519 / 1.26490
163 / 349 / 1.26890
305 / 1506 / 1.27270
131 / 519 / 1.27640
231 / 752 / 1.27980
243 / 2400 / 1.28310
363 / 1390 / 1.28620
141 / 207 / 1.28910
509 / 973 / 1.29170
6 / 627 / 1.29420
8 / 470 / 1.29640
20 / 514 / 1.29840
40 / 380 / 1.30020
4 / 346 / 1.30310
2 / 263 / 1.30520
0 / 365 / 1.30870
0 / 298 / 1.30910
0 / 215 / 1.30920
0 / 233 / 1.30940
0 / 225 / 1.30960
0 / 228 / 1.30970
USDCAD NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Put / Open Interest Put / Level
0 / 8 / 1.44928
0 / 20 / 1.43885
0 / 4500 / 1.41844
0 / 43 / 1.40845
0 / 91 / 1.39860
0 / 251 / 1.38889
0 / 387 / 1.37931
0 / 1426 / 1.36986
0 / 322 / 1.36054
0 / 1379 / 1.35135
0 / 474 / 1.34227
26 / 1378 / 1.33332
1 / 632 / 1.32448
49 / 1146 / 1.31576
44 / 1240 / 1.30714
40 / 796 / 1.29863
6 / 552 / 1.29022
0 / 223 / 1.28191
0 / 185 / 1.27370
0 / 301 / 1.26560
0 / 28 / 1.25759
0 / 4 / 1.24187
Volume Call / Open interest Call / Level
0 / 48 / 1.32465
37 / 118 / 1.31590
41 / 441 / 1.30727
64 / 777 / 1.29875
88 / 1411 / 1.29036
31 / 1476 / 1.28207
15 / 1136 / 1.27390
20 / 663 / 1.26583
18 / 572 / 1.25786
4 / 782 / 1.25000
0 / 324 / 1.24224
0 / 320 / 1.23457
0 / 260 / 1.22699
0 / 76 / 1.21951
0 / 50 / 1.21212
0 / 48 / 1.20482
0 / 7 / 1.19760
0 / 1 / 1.19048
0 / 4 / 1.18343
0 / 7 / 1.17647
0 / 24 / 1.16959
0 / 26 / 1.16279
0 / 17 / 1.14943
0 / 6 / 1.14286
0 / 4 / 1.13636
0 / 15 / 1.12360
USDJPY NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Put / Open Interest Put / Level
0 / 1891 / 120.481
2 / 114 / 119.047
10 / 351 / 118.342
0 / 234 / 117.645
0 / 115 / 116.957
44 / 354 / 116.276
41 / 121 / 115.603
81 / 231 / 114.938
1 / 277 / 114.280
5 / 271 / 113.629
0 / 363 / 112.984
14 / 397 / 112.347
17 / 778 / 111.716
93 / 824 / 111.090
109 / 870 / 110.470
111 / 719 / 109.856
381 / 1647 / 109.247
43 / 1016 / 108.642
171 / 1340 / 108.041
105 / 979 / 107.444
329 / 2000 / 106.851
435 / 1045 / 106.261
26 / 1302 / 105.673
23 / 3009 / 94.826
238 / 1588 / 95.295
131 / 2839 / 95.762
0 / 914 / 96.226
0 / 882 / 96.688
0 / 1145 / 97.149
0 / 1930 / 97.607
2 / 634 / 98.065
14 / 1581 / 98.521
0 / 110 / 98.976
Volume Call / Open interest Call / Level
0 / 301 / 109.000
0 / 604 / 108.375
19 / 297 / 107.760
17 / 203 / 107.154
18 / 733 / 106.556
140 / 686 / 105.967
169 / 1102 / 105.388
6 / 614 / 104.818
101 / 1587 / 104.256
109 / 904 / 103.702
409 / 1055 / 103.155
95 / 813 / 102.616
216 / 1180 / 102.084
4 / 829 / 101.559
54 / 2008 / 101.040
1 / 681 / 100.527
22 / 1513 / 100.020
11 / 390 / 99.519
1 / 1603 / 99.024
10 / 604 / 98.534
11 / 924 / 98.050
11 / 927 / 97.570
25 / 1063 / 97.095
10 / 1663 / 96.625
0 / 466 / 96.160
10 / 606 / 95.699
10 / 794 / 95.243
0 / 298 / 94.791
0 / 328 / 94.343
0 / 409 / 93.900
12 / 242 / 93.460
0 / 250 / 93.026
0 / 349 / 92.595
0 / 444 / 90.911
0 / 235 / 90.091
0 / 539 / 86.957
0 / 1600 / 86.581
USDMXN NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Put / Open Interest Put / Level
0 / 10 / 20.00000
0 / 27 / 19.04762
1 / 81 / 18.86792
0 / 40 / 18.69158
0 / 10 / 18.34861
Volume Call / Open interest Call / Level
0 / 20 / 19.41750
0 / 20 / 19.23079
0 / 1 / 19.04763
0 / 10 / 18.86793
1 / 77 / 18.69160
0 / 44 / 18.51852
0 / 40 / 18.34863
0 / 2 / 18.18182
0 / 30 / 18.01802
0 / 150 / 17.09402
XAUUSD NEW VOLUME & OPEN INTEREST, DATA (NOT ON CHART - TEXT)THIS REPORT IS IN TEXT ONLY. CHART DATA CONSISTS OF SESSION LEVELS COUNTED EARLIER, I HAVE PREPARED AN OPTION LEVELS TO SHARE WITH YOU, THAT CAN BE USED TO FILTER OUT LEVELS THAT YOU ARE USING IN YOUR ANALYSIS
Volume Put / Open Interest Put / Level
0 / 1527 / 949.90
0 / 980 / 969.90
0 / 1332 / 999.90
0 / 1735 / 1049.90
0 / 3101 / 1059.90
0 / 962 / 1074.90
0 / 844 / 1089.90
0 / 2837 / 1099.90
0 / 1580 / 1109.90
0 / 1064 / 1114.90
3 / 1293 / 1119.90
0 / 1977 / 1124.90
0 / 1019 / 1129.90
0 / 919 / 1134.90
0 / 3346 / 1149.90
0 / 1364 / 1154.90
0 / 1729 / 1174.90
0 / 1117 / 1179.90
0 / 915 / 1184.90
2 / 1524 / 1189.90
0 / 8798 / 1199.90
0 / 1111 / 1214.90
0 / 2354 / 1219.90
0 / 2832 / 1224.90
0 / 3015 / 1229.90
2 / 3154 / 1239.90
71 / 3513 / 1249.90
0 / 1658 / 1254.90
1 / 3049 / 1259.80
29 / 2242 / 1269.80
261 / 3071 / 1274.70
33 / 1650 / 1279.60
15 / 1013 / 1284.40
79 / 1746 / 1289.20
442 / 966 / 1293.90
285 / 5121 / 1298.50
333 / 1549 / 1302.90
462 / 1633 / 1314.50
79 / 2633 / 1317.70
90 / 2765 / 1320.60
22 / 1405 / 1325.20
177 / 1279 / 1328.30
Volume Call / Open interest Call / Level
0 / 950 / 1332.30
0 / 1132 / 1332.30
0 / 2944 / 1332.30
1 / 1671 / 1332.30
0 / 1254 / 1332.40
0 / 3395 / 1332.40
0 / 1857 / 1332.40
0 / 1025 / 1332.50
0 / 1384 / 1332.50
0 / 3282 / 1332.60
10 / 1014 / 1332.70
0 / 1309 / 1332.90
13 / 6061 / 1333.80
6 / 1190 / 1337.80
141 / 2902 / 1339.60
152 / 3450 / 1341.70
141 / 1175 / 1347.10
311 / 823 / 1350.40
529 / 4950 / 1354.00
110 / 3661 / 1362.10
6 / 1246 / 1366.50
18 / 1162 / 1371.10
159 / 2185 / 1375.80
158 / 1682 / 1380.70
23 / 1205 / 1390.40
26 / 841 / 1395.30
161 / 7717 / 1400.30
83 / 1449 / 1410.20
0 / 1618 / 1420.20
54 / 1113 / 1425.10
0 / 1369 / 1430.10
20 / 3289 / 1450.10
0 / 3086 / 1460.10
0 / 1426 / 1475.10
2 / 1461 / 1500.10
24 / 2174 / 1550.10
0 / 901 / 1600.10
EOW SUMMARY: RISK THE OVERALL WINNER - US30 & SPX @ 2% NEW HIGHSEnd of Week Summary:
1. On the week we saw risk outperform safe havens for the first time since the brexit vote and the SPX and DJ30 set new all time highs by 2% and 1.2% respectively - somewhat encouraging given this was the longest period post-crisis that equity indexes have had since new highs, with a total time of apprx 1 year.
2. Given the articles attached, this week was also the first week where risk-on/ risk-off positive correlations broke down and went back to some degree of normalcy, with Gold, Yen and bonds ending the week down some 5 - although the TRY Military Coup did cause some risk anxiety late on friday and caused safe havens to par some of their losses by 1% to close down apprx 4%.
3. Drivers of the risk-on rally i must say did come as a surprise, given the relatively subdued economic climate post brexit, with little planned risk-on drivers in sight. However, it was JPY's surprise talk from PM Abe/ BOJ Kuroda easing/ stimulus speculations at the start of the week (speculations around y10-20trn) that gave risk markets some legs - despite the reliability of the claims being denied by much of the JPY Govt though there certainly is no smoke without fire.
4. The other winner of the week was USD , much of which was safe haven demand on Friday (TRY Coup) but $ strength had built through the week on the back of hawkish FOMC speak sentiment (see attached) and risk markets rallying, causing rates to also rally (UST 10y averaging +4-5%) where all have contributed to increased market confidence which has translated into higher projected rate hike probabilities for their Sept/ Nov/ Dec meetings - currently at 12.9%/14.4%/38%, which is pretty much a 100% increase in expectations on the week.
- Once risk got going, given the severe depression, it was unsurprising that it did manage to run away higher - as safe havens needed a correction higher, if only in the short term.
Next week Projections:
1. Given last week, and most of friday, the obvious expectation would be to expect risk to continue on the offer and making new highs - however, late on friday afternoon we saw risk-on/risk-off balance tip in favour of safe havens as the TRY Coup uncertainty increased risk-off demand.
- Friday traditionally is a weak day for risk anyway as 1) end of week sellers/ weekend flat risk books cause a natural selling of risk, and a natural buying of safe havens as portfolios look to hedge weekend event risk over the two days that the markets are closed (especially as the session ended i the middle of the TRY coup).
- That in mind, i was surprised to see risk even trading better than safe havens on mid afternoon Friday at all (until TRY) - with Yen falling to 106.3 and goldd down 0.9%, i was confident that we would enter Monday with a risk-on tone.
SHORT GBPUSD @1.34 - BOE MINUTES HIGHLIGHTS - EXPECT AUGUST CUTAs expected BOE stood pat on their rate decision reiterating much of which was said last week by Gov M. Carney, the need for more analysis to be done is/ was key - " "Detailed Analysis" of All Policy Options Required" and "Extent Of Additional Stimulus Will Depend on August Forecasts".
IMO the notes were very bearish and almost but 100% chance of some sort of action in August - "Most MPC Members Expect To Loosen Policy In August". Given Brexit, and the Inflation conditions in the UK anyway a cut of the Bank Rate, if only for 12ms, makes sense to ensure a smooth transition - especially as the UK welcomes a new PM & the article 50/ Brexit negotiations are yet to get underway, this will undoubtably put some pressure on the UK economy, where much of which could be smoothed by a 25bps rate cut.
The minutes did point out interestingly that ""In the Short Run" Weaker GBP Will Boost Inflation" which makes sense, however they coupled this statement with "BOE Agents Report Some Businesses Delaying Investment", so the net impact of the Brexit event on inflation is yet to be seen.
Overall IMO the decision to hold Policy still in July was as expected however, given the median analyst had forecasted a 25bps cut, this "hawkish" response imo has opened up a beter oppourtunity to sell GBP, as in the medium-term/ post the Aug decsion GBP$ is likely to trade below the 1.28 lows, with many analysts forecasting GBP$ somewhere between 1.20-1.25.
Trading Strategy:
1. Short 1@1.34/335, sell 2@1.38/9 TP1 1.305; TP2 1.285 TP3 1.25XX. - I personally will not be operating SL on this trade as i believe BOE will cut in August 90%, and/or GBP$ will fall at somepoint on pure speculation, and/or as FOMC rate expectations continue to increase going into the later stages of the year.
2. Shorting any GBP rallies vs USD is also a good strategy from now on into the Aug rate cut, especially above 1.34.
*In the unlikely event GBP$ trades higher on the back of this e.g. to 1.38/9 then i still advise shorting, however, given how stable cable was trading into the event (and after the event) i dont expect much short headwinds now - you could tell the market didnt actually believe in the rate cut/ money wasnt behind the rate cut as GBP$ rose to its post brexit highs at 1.33... is that how a cross should react when money is actually backing a cut?
BOE Rate Cut/ Minutes Highlights:
Bank of England Leaves Bank Rate Unchanged At 0.5%
Bank Of England Leaves Bank Rate Unchanged At 0.5%
BOE Jul Minutes: MPC Voted 8-1 to Maintain Bank Rate at 0.5%
BOE Jul Minutes: 8 Voted to Keep Rate Unchanged
BOE Jul Minutes: 1 Members Voted to Increase Rate
BOE Vlieghe Voted to Lower Bank Rate to 0.25%
BOE: Most MPC Members Expect To Loosen Policy In August
BOE: MPC Members Had "Initial Exchange" on "Various Possible Packages"
BOE: Extent Of Additional Stimulus Will Depend on August Forecasts
BOE: "Detailed Analysis" of All Policy Options Required
BOE: "In the Short Run" Weaker GBP Will Boost Inflation
BOE: Longer-Term Outlook Depends on Inflation Expectations
BOE: Economic Activity Likely to Weaken in Wake of Brexit Vote
BOE Agents Report Some Businesses Delaying Investment, Hiring Decisions
BUY USDJPY @104 & SELL GBPUSD @1.33: RISK-ON, POLITICS, BOJ, BOEThe Federal Reserve's regulatory point man said work to address the lessons of the 2008 financial crisis won't be complete without better regulation of short-term funding both inside and outside the banking system.
St Louis Fed President Jim Bullard may be the Fed's new super dove, but he's no pessimist, he says. Bullard is the lone Fed official forecasting just one additional rate increase, and expects modest growth over the next two and a half years. But he reiterated Tuesday he's not expecting the economy to head south.
Trading Strategy
1. Given this I remain bullish on the $ in the medium term, despite this spike in risk-on which IMO is unlikely to last more than 2wks. In the immediate term I like long $yen as the best play ATM vs other expressions - with a target of 109, entry at 104 as 1) the markets have finally signalled they are ready for a recovery bull run, post the brexit risk-off/ safe haven rally - largley on the back of CB stimulus. I believe USDJPY has been the most sold risk-on asset, thus it is now ripe for buying; 2) JPY fiscal stimulus is likely to come; 3) BOJ is likely to deliver 10-20bps of cuts to its interest rate 4) we have broken the 104 "brexit seller resistance level" which has held since the vote - this break imo means we can now move to 109+ as the recovery leg before resuming lower; 5) the Fed Funds Rate curve continues to steepen across the curve but particularly aggressively in the front end (yesterday 10ys adding 5%) and as a result implied probabilities of hikes continue to rally across the 2016/17 tenors (Dec hike now 33.7% vs 29.2%Mon); 5) check the attached posts for long $jpy support
2. Secondly, short GBP$ is a trade i am closely eyeing.. I am a 70% seller at 1.32 (90% at 1.35) - short GBP rallies is the preferred trade as the BOE is likely to deliver easing in Aug that will drive us down to the 1.25 terminal rate that I have predicted - thus i am hoping we get some "poor information money" flows into GBP up to 1.34/5 going into Friday as 1) UK Political Uncertainty is eased - as Theresa May is the New PM starting Wednesday; 2) GBP buying on Thursday if the BOE doesn't cut rates, whilst I (and the market) believes an august cut is the likelihood instead, given the aggressive GBP selling these past weeks it is prudent to assume quite a large amount of money may/was be betting on a July Cut thus if this "disappoints" some of the market we could see cable trade higher to 1.34+; 3) Long GBP is the risk-on trade, so if risk holds up/ carries on rallying we could see GBP$ take us to 1.34+ - CB and Fiscal stimulus + the fact risk has been depressed for so long, i believe risk has the momentum to rally until the end of the week at least (next risk-rally then looks to 28th July for BOJ stimulus?)
3. The long $Yen and short GBP$ also acts as a dynamic hedge as the long UJ is the risk-on coverage, with the short cable the risk-off half - combining both semi-hedges your exposure, something i like to do when trading.
FED Tarullo Speech Highlights
- "the conditions for destructive runs that threaten financial stability could exist even where no institutions that might be perceived as too-big-to-fail are immediately involved"
FED Bullard Speech Highlights
- Bullard: An unemployment rate around 4.7%, gross domestic product growth of 2% and the Fed' preferred inflation gauge, the personal consumption expenditures index, at 2%.
- "If there are no major shocks to the economy, this situation could be sustained over a forecasting horizon of two and a half years"
- "we have no reason to forecast a recession given the current state of the US economy"
SELL EURUSD/ LONG USD, DXY: HAWKISH FED GEORGE SPEECH HIGHLIGHTSIMO FOMC George was largely bullish/ Hawkish $ on the margin; surprisingly coming out and stating for one of the first times that "Fed rates are too low" and "Not Raising Rates in June Was Due to Timing Issues" - these two statements imo hint that a hike coUuld be on the cards earlier than perhaps was expected (Dec), in-light of his opinion of them being too low and that the missed June hike was merely due "timing issues".. could these timing issue be corrected in July? Unlikely given the Brexit result (likely if the vote was bremain), but nonetheless this was more than encouraging.
On the wider economy George remained upbeat, highlighting last weeks NFP report as "welcomed news", and in the medium term reaffirming that "pace of job market growth has been notable" and "economy nearing full employment.
The only downers were his comments regarding business investment which he said was "weak" but after went on to assure that "outside of energy, business investment levels were better". Further, he cited that brexit issues were "longer run" uncertainties that the FOMC will watch.
Federal Funds Rate Implied Hike/ Cut Probability curve updates:
On the back of the strong 100k+ beat NFP print last week, going into this week we have seen an aggressive steepening in the Fed Funds implied prob curve across the tenors; Fridays steepening trend has continued into this week, where now a September/ Nov Hike trades at 12%/11.8% vs 5.9%/5.9% on Friday and 0%/0% on Thursday, with a Dec hike trading at 29.6% vs 22.5% Friday.
- This aggressive steepening, especially in the front end (where probabilities have doubled), is likely a function of FOMC member Georges Hawkish comments today, the NFP print and the aggressive recovery in risk across the board in the past few days which have all collectively improved confidence, which in turn has eased sell-side pressure on UST rates - today 10y UST rates have managed to trade 4.4% higher on the day (tnx), with 30y yields also up +0.95% - this is the first real break of downside pressure we have seen in rates for the past month.
Trading strategy:
1. The above combined has helped my broad long $ view with my favourite expressions short term being in NZD$ and AUD$ downside (See attached posts). In the medium term, EUR$ and $JPY dollar upside are my favourite trades for the risk-on element that will readjust the USD higher in the backend of this year (see attached posts); And the Monetary policy divergence + brexit uncertainty that should bring EUR$ to a lower equilibrium in the future also. Alternatively, this view can be aggregated as pictured into a long DXY play, where imo, it trades 3-4% below equilibrium - index should be near 100.
FOMC Member George Speech Highlights :
-Fed's George: June Jobs Data Was 'Welcome News'
-Fed's George: U.S. Economy Has Proved 'Resilient'
-Fed's George: Expects to See 'Fairly Steady Pace of Growth'
-Fed's George: Consumers Strong, But Business Investment Weak
-Fed's George: Outside of Energy, Business Investment Levels Better
-Fed's George: Pace Of Job Market Growth Has Been Noteworthy
-Fed's George: Economy Close to Full Employment
-Fed's George: Labor Market Recovery Not Evenly Shared by Workers
-Fed's George: Labor Pressured by Loss of Middle Skilled Jobs
-Fed's George: Fed Policy Limited in Role For Long Term Labor Trends
-Fed's George: Fed Rates Are 'Too Low'
-Fed's George: Fed Should Raise Rates Gradually
-Fed's George: Not Raising Rates in June Was Due to 'Timing Issues'
-Fed's George: Brexit Issues Are Longer Run Items to Watch
RISK ON/ OFF PARADOX CORRECTION - SHORT SPX/ FTSE & USDJPY P2 Post Brexit SPX vs USDJPY
1. One had expected risk to sell off post brexit as global uncertainty increases, given the amount of volatility in the FX markets in the lead up, this was the rational expectation (whilst VIX traded subdued). However, instead, SPX recovered 6% whilst Yen also rallied 7% higher in the days following the vote.
2. This risk-on risk-off positive correlation rally is almost unseen in markets (especially not at the 75% correlation level) as JPY and SPX positively correlate for the first time in 4 years (as below).
3. As discussed previously this is either 1) because markets are unusually evenly split on sentiment, going against herd behaviour with the marco outlook trading as a non-consensus between participants; 2) CBs have given risk an artificial boost based on supportive statements/ measures.
Trade the paradox
1. Short FTSE100 @6600-6800 resistance with a 5700TP (January lows) - once artificial BOE easing rally is finished, likely near 66-800 FTSE will plummet in the medium term as 1) This underlying risk-off bias which has gone un-priced as yet (safe havens up 21% in 2016) prices - not to mention reaching near ATHs, with 10y resistance.; 2) brexit (still not priced in equities)/ Political uncertainty drags on economy and stocks - especially financials, which has a knock-on effect of corp credit tightening; 3) this structural CNH deval prices and hits UK export stocks as it did in Jan
2. Short SPX @2100 with a 1985TP - SPX at these levels looks an attractive short 1) as discussed CNH depreciation which is a macro issue for all stock Exporters to China (biggest market/ growth market) hasnt priced any revenue downside yet like they did in January (-8-13% previously). 2) underlying risk-off bias is still yet to reprice risk lower (2016 safe havens up 21% av. Gold 28%) + only 2% away from ATH - favourable short lvls; 3) Earnings sell-off likely around the corner as investors derisk/ hedge against "shocks"; 4) Brexit induced CB easing/ dovish rally likely to fade soon as it isnt structural growth and FOMC rates are recovering in the back-end (Dec Hike looms). SPX has a more conservative target vs FTSE as less brexit downside & its a structurally stronger index with growth stocks
3. Id also suggest dynamically hedging these positions with 1) Long high growth and low China revenue individual stocks e.g. Goog, FB and/ or 2) shorting GBP index or a GBP cross , lower GBP hedges any potential BOE easing rallies that the FTSE short may negative experience, and also short GBP is a solid trade to have regardless of any FTSE risk you have on the table.
*See part 1 for more information "RISK-ON RISK-OFF POSITIVE CORRELATION? SPX VS GOLD, JPY & UST P1"
SHORT EURUSD: DOVISH ECB MONETARY POLICY MINUTES - FRESH EASING?IMO the ECB minutes were the most dovish/ clearly directed statements out of the ECB for several months. Before this, and in the past several speakers comments, sentiment has been towards the hawkish/ stale side, citing "ECB has done enough" as the main rhetoric.
The June Minutes however show a renewed positioning of the ECB, where they clearly imply they are willing to take further action if needed be with quotes such as "ECB Ready to Act, Using All Its Policy Tools if Needed", and unlike BOJ Kuroda, the ECB clearly seem to have taken ownership of their poor economic ownership finally by saying " Underlying Inflation Has Yet To Show Clear Signs of Upward Trend" and "To Monitor Inflation Outlook Closely" - given that inflation is their headline goal, such comments, when combined with the above readiness to "act", makes the idea of further easing a much higher probability, especially of late where key members almost have refused to mention further action.
IMO, this shift in rhetoric to the dovish/ directive side is in an aim to try and put some negative pressure on the EUR since it has managed to par losses vs the USD, whilst bleeding 12% appreciation vs the GBP. The ECB are likely trying to talk down the currency with such rhetoric, especially in light of brexit, where their currency has failed to revalue/ adjust for the negative economic impact that is coming.
I see a very bearish outlook for the EUR over the coming weeks/ months given this new dovish ECB stance, much like the GBP, when a central bank wants the currency lower, that is usually the path it follows. Potential dampeners however are the fact that Draghi has before failed to deliver market expectations (Dec 2015 most notable), so unlike the GBP, the acertive nature of these dovish monutes likely have a diminished impact relatively to say the GBP.
Nonetheless, i expect the ECB to continue with the rhetoric and given the appreciation/ stability with their biggest trading partners (USD/ GBP) i expect the ECB to take further action in the near term as as it stands, the EUR exchange rate mechanism will/ is failing to transmit the inflationairy pressure they need (infact the opposite) and further easing is the only way to solve this. Thus, I am short EUR from here, especially against the USD where i think it could be up to 500pips overvalued as it is, given its inability to price previous ECB stimulus (March) and Fed Hike in Dec - this short view is especially the case on the back of likely more easing + brexit uncertainties trade seemingly underpriced (vs EJ) and the new EU export inefficiency to the UK one of its biggest markets (given 12% appreciation)
- Clear 4-8wk targets are the 1.082 handle in the near term, with 1.052 lows from dec last year the next aim on the back of any fresh easing/ brexit uncertainties still need to be priced.
ECB Monetary Policy Minutes
-ECB Minutes: ECB Ready to Act, Using All Its Policy Tools if Needed
-ECB Minutes: Brexit Vote Seen As 'Important Source of Uncertainty' for Euro Area Outlook
-ECB Minutes: To Monitor Inflation Outlook Closely
-ECB Minutes: Brexit Could Cause Significant Negative Economic Spillovers to Euro Area
-ECB Minutes: Brexit Impact Could Be Transmitted to Euro Area Through Trade, Financial Markets
-ECB Minutes: Underlying Inflation Has Yet To Show Clear Signs of Upward Trend
-ECB Minutes: Investors Expect Future Challenges for ECB in Sourcing Enough Bonds Under QE Program
-ECB Minutes: It Shouldn't Matter Much Which Precise Assets Are Purchased Under QE
-ECB Minutes: What Matters is Overall Purchase Volume, Associated Money Creation
-ECB Minutes: Composition of Bond Purchases Still Matters to Investors
-ECB Minutes: Health of Euro Area Banks is Key for Effective Transmission of ECB Policy
SHORT NZDUSD: +2 STANDARD DEVIATION PIVOT POINT ON DAILY & H1Also as additional technicals to support the short NZD$ view:
1. On the daily, weekly and H1 NU currently Trades (and at 0.73) close/ at to its +2 standard deviation lines, these are highly resistive.
- Assuming NU trades mean reverting +2SD means there is a 95% chance of a price reversal/ 95% of all prices should be below the +2SD channel lines (e.g. NU highly likely lower from here).
-- And as you can see by the Circle Yellow highlights NU has held this +/- 2SD discipline in the past so is highly likely to maintain these levels in the future.
2. Also NU trades significantly above its 60, 120, and 250 Moving Averages on 1h, 4h, 1D, 1wk - this also signals strong overbought prices, where selling has a higher probability of success.
*Be sure to check the attached post "SELL NZDUSD @0.73 - TP 700PIPS: BREXIT, RBNZ, FED & USDJPY HEDGE" for NZDUSD short fundamentals*
SELL NZDUSD @0.73 - TP 700PIPS: BREXIT, RBNZ, FED & USDJPY HEDGEShort NZDUSD is in my top 2 FX Trades for several reasons:
1. NZD is considered the riskiest G10 currency cross, so NZD trades weaker in risk-off markets, or when equities/ SPX trade lower (you can see the high correlation with SPX at the bottom of the graph).
- With Brexit occurring last week, global risk has increased, this is especially the case for NZD due to commonwealth connections. Therefore NZD is likely to come under pressure in the future as risk-off sentiment continues to dominate, as the US Election nears, Global growth worries continue (Japan, Europe, China) and Brexit/ uncertainty about further EuroArea exits continues to intensify - we can see Gold and US Treasuries continue to gain supporting the risk-off view and thus supporting selling NZD. Also, risk-off encourages $ buying as a safe haven deposit on the Brexit backdrop.
- Further, going into earnings season next week, historically risk currencies (NZD) perform poorly as investors seek safer assets to hedge against earning surprises, thus this helps NZD selling and USD buying. Plus, most investors will want to hold some $ cash in order to fulfil their earnings based equity trading, so this also helps the short Kiwi$ trade by increasing $ demand relative to NZD.
2. The RBNZ Meeting on the 10th August is likely to be dovish and I 80% expect a rate cut of 25-50bps from 2.25% to 2.00%-1.75% , as;1) Brexit risks are weighed in on and potentially priced into a rate decision, in follow up to the supportive/ dovish statements from RBNZ members immediately after the Brexit decision and 2) NZD Macro Environment has performed poorly since the March Rate cut from 2.5% to 2.25% e.g. The last prints still consistently dragging: Retail Sales at 1.0% vs 1.1%qoq & 0.8% vs 1% Q1qoq; CPI 0.4% yoy, 0.2% qoq; Unemployment Rate at 5.7% vs 5.5%. 3) the RBNZ has a historical pattern of cutting their rate every third meeting, and this August meeting is the third meeting. Plus it will have been 5 months since their last cut in March - this also historically is a large time for a another rate cut as previously to that the RBNZ cut in December, Dec-Mar which was only 3 months, and before that in october (oct-dec) which was 2 months so the odds are good if NZD data continues to be bad given the time since the last cut of 5 months is relatively large. And the gap since their last meeting at June 10th is 2 months which is the biggest gap they have.
- Risks to the RBNZ Rate cut view are that;1) Brexit risks are de-priced due to UK Political skulduggery pushing the likelihood of the brexit into 2017 (if at all) 2) Their Inflation, Employment and GDP data manage to recover and show structural signs that the rate at 2.25% is sufficient for continued economic recovery e.g. NZD May Employment Change print surprised to the upside at 1.2% vs 0.8%, and their June GDP outperformed for Q1 at 0.7% vs 0.5% qoq & 2.8% vs 2.6% yoy. So if the CPI and employment data due to be released before the RBNZ August 10th meeting shows a continued/ structural/ aggressive recovery this will reduce the likelihood of a rate cut. Nonetheless, my money is that this isn't the case (with data continuing to trade subdued) and I therefore expect them to provide reassurance to markets with a strong dovish tone, and a 25bps cut - citing Brexit and non-outstanding economic indicators as the impetus for the changed policy.
*It should be noted, in order for me NOT to consider a 25bps cut likely in August we would have to see an outstanding CPI and employment print e.g. CPI 1.0%-0.8% (0.4% last), and unemployment 5.3/4% (5.7% last), given it has been 5 months since the last cut - the RBNZ would be expecting to see such figures to consider the current rate of 2.25% as working/ sufficient.
SHORT AUDUSD TP 800PIPS: BREXIT, RBA, FED & USDJPY HEDGEShort AUDUSD is in my top 3 FX Trades for several reasons:
1. AUD is considered a riskier G10 currency cross, so AUD trades weaker in risk-off markets, or when equities/ SPX trade lower (you can see the high correlation with SPX at the bottom of the graph).
- With Brexit concurring last week, global risk has increased, this is especially the case for AUD due to commonwealth connections. Therefore AUD is likely to come under pressure in the future as risk-off sentiment continues to dominate, as the US Election nears, Global growth worries continue (Japan, Europe, China) and Brexit/ uncertainty about further Euro Area exits continues to intensify - we can see Gold and US Treasuries continue to gain supporting the risk-off view and thus supporting selling AUD. Also, risk-off encourages $ buying as a safe haven deposit on the Brexit backdrop.
- Further, going into earnings season next week, historically risk currencies (AUD) perform poorly as investors seek safer assets to hedge against earning surprises, thus this helps AUD selling and USD buying. Plus, most investors will want to hold some $ cash in order to fulfil their earnings based equity trading, so this also helps the short AU trade by increasing $ demand relative to AUD.
2. The RBA Meeting on Tuesday the 5th is likely to be dovish, as 1) Brexit risks are weighed in on again, after supportive/ dovish statements from RBA members following the Brexit decision and 2) AUD Macro Environment has performed poorly since the last meeting and the May Rate cut e.g. Retail sales 0.2% vs 0.3%, Unemployment flat at 5.7%.
- However, I dont expect an RBA rate cut, as they cut last just 2 months ago in May by 25bps to 1.75% and their GDP print was firm at 3.1% v 2.8% yoy and 1.1% v 0.8% with Unemployment also stable (yet to see inflation), so I expect them to provide reassurance to markets with a strong dovish tone, with possible hints to a August rate cut - citing Brexit and looking forward to their end of July Inflation print as a gauge for further rate cuts. Nonetheless the dovish rhetoric should be strong enough to put pressure on AUD and tip the scales south supporting the AU short.
3. From a USD demand point of view, last week we saw USD lose 160pips against the AUD as Brexit Uncertainty negatively hit the Feds Rate hike cycle expectancy, flattening the curve in the front end which ruled out any hikes until Dec or 2017, fewer hikes = less USD strength.
- However, since the beginning of the week where brexit risks ruled out hikes in the near term, the end of the week managed to turn rate hike expectations around as Brexit likelihood decreased/ shifted into 2017. This helped the Fed fund futures curve recover/ steepen somewhat in the front end, with the implied probability of a hike increasing from 0% to 5.9% for both September and November, whilst the probability of a hike in December also steepened significantly from 13.3% to 22.3% with the probability of a 50bps hike being priced for the first time at 1.1%. This trend of Fed Hike recovery is likely to continue as long as Brexit risks remain subdued, so we can expect USD to begin to price stronger in the coming days/ weeks.
4. Technically, AUDUSD trades 100pips away from a key handle at 0.76xx which is a double top and may provide the ideal short area. Further, higher than that at 0.78xx is the 12 month high which is also potentially a great level to get short from as a double top
5. Volatility - 1wk, 2wk and 1m (-1.52, -1.57, -1.60) AUDUSD Risk Reversals all trade with a downside bias indicating put/ downside demand is higher than upside, so the option market net expects AUDUSD to come down over the above tenors.
- Out through the 5th, 6th, and 7th (post RBA) we see large notional OTM put options and open interest at 0.7365, 0.7440 & 0.7445 which supports the view that the RBA will be dovish and that AUDUSD is likely to hairpin around the 0.76xx double top level.
RISK-OFF YEAR: BREXIT & US PRESIDENTIAL ELECTION: BUY GOLD @12592016, the year of the Risk-Off Asset
Historically Gold has performed +10-20% in the 6 months into US Presidential Election years AND also by longing Gold on this pull-back it opens up the opportunity to benefit from the potential tail risk that the UK votes to "Brexit" in which Gold will likely trade through $1400.
Gold is one of my favourite plays for 2016 for these reasons so I suggest a strategy of:
Buy GOLD - 1@1259 2@1237 3@1210
Long term TP $1395 SL $1195
Short term TP $1310 SL $1195
- Near-term on a UK Vote to stay we will likely see Gold risk-on sell off towards the $1200 handle - this is a great opp to get a good average price by buying Gold on its way down as I expect Gold to trade close to $1400 by years end and into the Election.
- A UK Vote Leave will put Gold close to the $1400 level within a week.
- The time-risk are asymmetrically skewed to the upside for Gold IMO as 1) in the near term, Brexit and Global economic unbalance uncertainty buoys the precious metal; Further, the recent failure of risk markets (SP/DJ) to set new highs despite posting recovery, likely signifies the end of the equity bull run, and thus the start of the Gold bull Run.
- and 2) The US FOMC Rate Hike Cycle, US Presidential election and wider Global Economic concerns of Deflation and low-growth which is a systemic issue and is also likely to be the case for the foreseeable future (with the 2nd and 3rd largest Central Banks - ECB and BOJ under pressure - among much of the developed world) all contribute to drive the increase in risk-off/ safe haven demand for Gold over the Long-Medium term.
- Gold is selling-off due to the increased risk appetite in the market currently as the near-term Brexit risk is soothed by "Stay" biased polls - HOWEVER, with Gold Volatility trading 50% lower than it was a week ago (reflecting the settled risk this week) with current ATM at 15%, and with 1M Risk-Reversals trading with a positive call skew of 3% we can expect an upward bias over the coming weeks/ months.
- As lower Implied Vols are projected across the 12m options curve and the 12m Futures curve is also trading contango which both imply the Gold market sentiment is for the price to rise.
- Finally, as the FOMC Rate hike cycle intensifies over the medium-term, bond prices will come under pressure, thus driving further demand for Gold as the higher quality and higher return asset is sought.
BREXIT AND GEO-POLITICAL AFTERMATH: BUY USDJPY - HOW TO TRADENow that the Brexit risk has been realised the mentioned pairs above will share some correlation this week as the market changes between risk-on and risk-off as MANY on the events continually drive the sentiment shifts.
My Plan & Expectations
USDJPY
1. My conviction for UJ is long 8/10.
-UJ traded to lows of 98.9 in the midst of the brexit hype, as the market hunted for risk off. Further, as with GBP it seems entities over the weekend have increased their JPY exposure to account for the increased percieved risk within the market causing UJ to open lower at 101.6
- However, over the weekend the BOJ had a meeting with other Japanese officials to discuss their plan (an easing plan likely) to combat 1. their inflation problem and now 2. the JPY's safe haven demand strength - both of which are cured by 8/10 aggressive easing policies by the BOJ
- Thus I expect the BOJ to hold and emergency meeting this week announcing these changes to have immediate affect as UJ at 100 severely puts the brakes on their inflation growth target.
- Further, as previously mentioned the BOE, SNB, FOMC and ECB (among others) have all said since the brexit vote that they are prepared to provide liquidity to markets and their rhetoric has been very dovish.
- Thus the BOJ's new easing package which is likely to be aggressive e.g. 20bps rate cute and a large increase QE, will help depreciate the currency through increasing supply and reducing jpy demand. Further, the supportive/ dovish stance of the worlds central banks (particularly BOE and FOMC) will help ease risk aversion which in turn SHOULD reduce JPY demand therefore helping UJ trade better to the upside.
So my trading plan for UJ is to buy at levels <102 - 101/2 is ideal (we are unlikely see 99 or 100 again as the risk-off impetuses have died). UJ should hold this range between 101.2 and 103 until CB meetings are in place - I will be holding UJ in the long term through to 110-115 at least. I have 8/10 long conviction for UJ
Volatility update:
Current UJ ATM 50 delta vols trade at 37.5%, which is surprisingly 3-4x higher than it was last week (the risk and volatility may not be over).
1wk UJ ATM 50 delta vols trade at 20%, significantly lower than current at 37.5% - I think this is a function of the central bank meetings expected this week which are inflating current volatility, with 1wk far vols lower as the events will have elapsed already.
1m UJ ATM 50 delta vols trade up on the week at 15.5% though the time curve is flattening meaning UJ vol is falling over time - lower vols = better conditions for UJ buying.
Current UJ Option demand is skewed significantly to the downside, with Puts 40% vs calls 36% thus puts are in demand by about 10% more than calls - this supports nearterm risk-off views (RR -4).
USDJPY as a measure of market risk.
I still suggest using UJ as a measure of GBPUSD market risk - the volatility seemingly isnt over, and with near term uncertainty high, it is prudent to track UJ and use breaks of its 101.2-103.2 range as signals of net risk on or risk-off commitment .e.g. UJ higher risk on (jpy selling), UJ lower risk off (jp buying).
The risk off move for GU imo is lower in this environment, and the risk-on move is higher. Thus, IMO UJ and GU are sync'd, and the two should be used as a tool.
