The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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Too calm too quickly?
John Hardy
Head of FX Strategy
Yesterday was a fairly typical Monday action for the period prior to the February volatility event – practically an extension of the weekend. Implied volatilities continue to collapse in most cases – EURUSD one-month, for example, down below 6.75% after spiking as high as 9.72% in early February. For perspective, mid-December 2017 saw a 3-year low at 5.15% and even the current level is below most of market history of the last 10 years. USDJPY implied volatility is just below 8% but is likewise three handles lower from the highest level in February. It is almost eerie to see the speed that market calm is attempting to return and we suspect the quiet could prove a red herring – certainly for the medium-term time frame, given critical questions for the outlook this year as the QE era winds down (and if it doesn’t, it will be for the very bad reason that the economy is weakening).
One factor that could shake the market quiet is weakening confidence that the Fed’s “terminal rate” wil not stretch beyond the 3.00% level as is widely assumed. Incoming data and next week’s Federal Open Market Committee meeting could trigger more interest on this front as we are a mere few basis points from that level (looking out at 2020 and later EuroDollar STIRs). Today’s US CPI data is one of the last interesting data points ahead of next week’s FOMC meet, though no drama is expected: a 1.8% reading for the core and 2.2% for the headline.
Chart: EURUSD
Market expectations for new drama in the price action continue to drop, making it less expensive for traders to express an opinion on the next breakout in EURUSD via options. To the downside, the setup looks clearest, with a move through the range low around 1.2155 possibly setting up a challenge of 1.2000 and even 1.1940 (a Fibo retracement).
Source: Saxo Bank
The G-10 rundown
USD – USD looks resilient within the G3 ahead of the CPI release – most interesting scenario an upside surprise, as a downside surprise encourages risky currencies and the “Goldilocks” trade.
EUR – the euro stuck in a rut here and that may remain the case for a while, with sentiment getting worn down at the edges by the political spectacle in Italy. As well, watching the longer-term arc of the EU existential risks as Merkel-Macron meet.
JPY – USDJPY looks bid and we have noted the recent bullish momentum divergence. The bearish case sorely challenged if we head north of 108.00-50 zone.
GBP – some focus today on the Spring Statement from Chancellor Hammond, but bigger fish to fry with the next round of Brexit news. UK short rates are edging higher, providing some support into next week’s Bank of England meeting. Let us recall the rather hawkish guidance from the prior meeting cycle.
CHF – European rates going nowhere in a hurry with Draghi’s heavy hand on guidance at the ECB meeting, but let’s watch if 1.1700 suffers a bigger break if US rate expectations head higher from here, and USDCHF interesting for further upside prospects if 0.9400-50 supports.
AUD – AUD overachieving here, although short Australian rates are pushing the top of the range of the last year. No real bearish trigger for AUDUSD until we get back below 0.7750-00.
CAD – CAD has recovered very little given the market backdrop and good news on exceptions to Trump’s tariffs. Keeping upside focus in USDCAD as long as 1.2700-50 remains intact.
NZD – a wobble in the kiwi as AUDNZD has bogged down in a range, but awaiting catalysts – perhaps next week’s RBNZ meeting the next major one for kiwi traders.
SEK – Swedish CPI up tomorrow and will inevitably generate volatility – especially on any significant upside surprise.
NOK – NOK volatility should pick up dramatically on Thursday with high expectations on Norges Bank guidance if we are to judge from the steep advance in short Norwegian rates in recent weeks and EURNOK near the pivotal 9.50-52 area going into the meeting.
Upcoming Economic Calendar Highlights (all times GMT)
10:00 – US Feb. NFIB Small Business Optimism
12:30 – US Feb. CPI
14:15 – Canada Bank of Canada’s Poloz to speak
22:10 – Australia RBA’s Kent to speak
23:50 – Japan BoJ Minutes
One factor that could shake the market quiet is weakening confidence that the Fed’s “terminal rate” wil not stretch beyond the 3.00% level as is widely assumed. Incoming data and next week’s Federal Open Market Committee meeting could trigger more interest on this front as we are a mere few basis points from that level (looking out at 2020 and later EuroDollar STIRs). Today’s US CPI data is one of the last interesting data points ahead of next week’s FOMC meet, though no drama is expected: a 1.8% reading for the core and 2.2% for the headline.
Chart: EURUSD
Market expectations for new drama in the price action continue to drop, making it less expensive for traders to express an opinion on the next breakout in EURUSD via options. To the downside, the setup looks clearest, with a move through the range low around 1.2155 possibly setting up a challenge of 1.2000 and even 1.1940 (a Fibo retracement).
Source: Saxo Bank
The G-10 rundown
USD – USD looks resilient within the G3 ahead of the CPI release – most interesting scenario an upside surprise, as a downside surprise encourages risky currencies and the “Goldilocks” trade.
EUR – the euro stuck in a rut here and that may remain the case for a while, with sentiment getting worn down at the edges by the political spectacle in Italy. As well, watching the longer-term arc of the EU existential risks as Merkel-Macron meet.
JPY – USDJPY looks bid and we have noted the recent bullish momentum divergence. The bearish case sorely challenged if we head north of 108.00-50 zone.
GBP – some focus today on the Spring Statement from Chancellor Hammond, but bigger fish to fry with the next round of Brexit news. UK short rates are edging higher, providing some support into next week’s Bank of England meeting. Let us recall the rather hawkish guidance from the prior meeting cycle.
CHF – European rates going nowhere in a hurry with Draghi’s heavy hand on guidance at the ECB meeting, but let’s watch if 1.1700 suffers a bigger break if US rate expectations head higher from here, and USDCHF interesting for further upside prospects if 0.9400-50 supports.
AUD – AUD overachieving here, although short Australian rates are pushing the top of the range of the last year. No real bearish trigger for AUDUSD until we get back below 0.7750-00.
CAD – CAD has recovered very little given the market backdrop and good news on exceptions to Trump’s tariffs. Keeping upside focus in USDCAD as long as 1.2700-50 remains intact.
NZD – a wobble in the kiwi as AUDNZD has bogged down in a range, but awaiting catalysts – perhaps next week’s RBNZ meeting the next major one for kiwi traders.
SEK – Swedish CPI up tomorrow and will inevitably generate volatility – especially on any significant upside surprise.
NOK – NOK volatility should pick up dramatically on Thursday with high expectations on Norges Bank guidance if we are to judge from the steep advance in short Norwegian rates in recent weeks and EURNOK near the pivotal 9.50-52 area going into the meeting.
Upcoming Economic Calendar Highlights (all times GMT)
10:00 – US Feb. NFIB Small Business Optimism
12:30 – US Feb. CPI
14:15 – Canada Bank of Canada’s Poloz to speak
22:10 – Australia RBA’s Kent to speak
23:50 – Japan BoJ Minutes