Macro: Sandcastle economics
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Headlines giveth, taketh away from GBP
John J. Hardy
Chief Macro Strategist
European Union Brexit negotiator Barnier indicated a willingness from the EU side to agree to a Brexit deal that offers unprecedented relationship with the union, a new turn that caught sterling shorts unaware after a grinding and ominous uncertainty had built in recent weeks. The sterling rally went nearly vertical for a few hours until Barnier later made it clear that the EU side is preparing for the eventuality of a no-deal Brexit as well.
Specifics on the nature of the deal are absent, but we may be a bit wiser ahead of the weekend as the UK’s Brexit secretary Raab will head to Brussels tomorrow for more negotiations. Traders might consider positioning for a binary Brexit outcome in options to avoid extreme short-term moves on headline risk – often, as with the Brexit vote itself, spreads can offer surprising risk/reward in these situations as implied volatilities for the deeper out of the money leg of the option structure can be quite high.
The difficulty is one of timing – when do we know which way the chips will fall?
Elsewhere, USDJPY jumped higher through local resistance (see below) as US yields have drifted back higher while equity markets have been on a strong run higher and the EURUSD consolidation has been shallow indeed as the pair quickly bounced back to the 1.1700 area after yesterday’s dip.
Don’t look now, but the Turkish lira is under strong renewed pressure, falling all the way to the 6.70 area as of this writing, and other EMs are also on the defensive even as the USD picture is mixed at best and China has kept the renminbi supported (though slowly slipping back lower it seems.). It all feels rather nervy and uncertain, which could mean the USD remains supported here.
Chart: USDJPY
Specifics on the nature of the deal are absent, but we may be a bit wiser ahead of the weekend as the UK’s Brexit secretary Raab will head to Brussels tomorrow for more negotiations. Traders might consider positioning for a binary Brexit outcome in options to avoid extreme short-term moves on headline risk – often, as with the Brexit vote itself, spreads can offer surprising risk/reward in these situations as implied volatilities for the deeper out of the money leg of the option structure can be quite high.
The difficulty is one of timing – when do we know which way the chips will fall?
Elsewhere, USDJPY jumped higher through local resistance (see below) as US yields have drifted back higher while equity markets have been on a strong run higher and the EURUSD consolidation has been shallow indeed as the pair quickly bounced back to the 1.1700 area after yesterday’s dip.
Don’t look now, but the Turkish lira is under strong renewed pressure, falling all the way to the 6.70 area as of this writing, and other EMs are also on the defensive even as the USD picture is mixed at best and China has kept the renminbi supported (though slowly slipping back lower it seems.). It all feels rather nervy and uncertain, which could mean the USD remains supported here.
Chart: USDJPY
USDJPY had a go through the local resistance and the top of the Ichimoku daily cloud. As I discussed in yesterday’s FX Update Webinar, the move looks technically interesting but we need to see global bond yields coming to life for a sustained move beyond the highs for the cycle around 113.00. And if risk appetite swoons here, the JPY starts to play a safe haven role and could even outperform a strong USD, keeping this pair thoroughly rangebound and boring.
Chart: GBPCHF
A classic momentum divergence setup (recent new price lows without new momentum indicator lows) with a large bullish candlestick. From here we could see very sharp further short covering if the headlines remain sterling-positive.
A classic momentum divergence setup (recent new price lows without new momentum indicator lows) with a large bullish candlestick. From here we could see very sharp further short covering if the headlines remain sterling-positive.
The G-10 rundown
USD – rather firm and could firm further if the attention on EM woes picks back up. Also interesting whether the July US PCE inflation up today surprises either way and how much the market chooses to react after Powell dismissed the risk of accelerating inflation at his recent Jackson Hole speech.
EUR – good news on the trade front as the EU as Politico runs a story suggesting the EU is willing to lower car tariffs. Have a hard time seeing what takes EURUSD beyond recent highs for any sustained period of time without euro-positive news.
JPY – the yen weaker still yesterday, but to sustain a real sell-off we need to see global bond yields come to life and they have been so moribund for so long that confidence is low that anything beyond a poke at the limits of the longer-term ranges is afoot.
GBP – an enormous bounce yesterday from new cycle lows versus the euro and Swiss franc – looks very technically promising and further signs of hope that UK is inching toward a deal could shift sentiment, with plenty of speculative positioning fuel to drive short-covering.
CHF – EURCHF likely bottled up in a range until or unless the Italian sovereign yield situation either improves or deteriorates. Somewhat surprising we didn’t get any isolated CHF downside on the positive Brexit headlines. USDCHF beginning to look technically oversold.
AUD – not usually data that is closely tracked, but the private capital expenditures and building approvals releases overnight brought no joy. AUD looks rather heavy given the reasonably supportive backdrop of the last few sessions.
CAD – market awaits Canadian GDP data tomorrow and CAD longs are hoping for positive trade headlines as Canada seeks to get in on the trade deal terms set between the US and Mexico, effectively replacing NAFTA. The US side is pressuring for a deal ahead of the weekend, so the last session for the week looks pivotal for USDCAD.
NZD – the ANZ Business Confidence and Activity Outlook survey shows both gauges plumbing new post-global financial depths. It appears businesses have concerns on the government’s policy roadmap, including the risk of a higher minimum wage and the inability to pass costs along to customers.
SEK – finally, cracks appear in the EURSEK rally after the one-way traffic of the last couple of weeks. We still like the idea that that the market is over fearful of the September 9 election outcome and the pair could trade back in the range toward 9.25 in the weeks ahead if the centre holds and SD manages a sub-20% result at the upcoming election. Still, extreme volatility risk remains if that proves too complacent a view and the huge disagreements in the polls are driving the recent uncertainty.
NOK – a bit stronger, perhaps in sympathy with the SEK bounce, but also as oil prices are nearing the cycle highs again. EURNOK rally looks overdone.
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