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Policydivergence

BOJ: JPY V USD, EUR, GBP - WHAT THE OPTION MARKET IS TELLING US50 Delta ATM Volatilities: USDJPY - - $Yen has an ATM implied volatility curve of 55.95%mrkt 24.08%1wk 18.31%2wk 14.12%1m - Obviously we are aggressively steeper in the front end, with BOJ tomorrow and JPY MOF Fiscal Package details coming next week providing heightened vol for the 1day and 1wk vols - naturally we then see the curve tail off as the event vol fades. GBPJPY - - £Yen has an ATM implied volatility curve of 58.66%mrkt 25.93%1wk 23.02%2wk 18.30%1m - The same can be said about sterling yens ATM curve, adding that it is steeper accross the tenors as the recently heightened GBP risk/ BOE event vol is priced into the 1wks and 2wks greater relatively vs $yen, with 1ms also outperforming $Yen as the perceived GBP risk/ vol post-brexit carries higher vs the USD. EURJPY - - EUROYEN has an ATM implied volatility curve of 49.42%mrkt 22.82%1wk 18.03%2wk 14.23%1m - EUROYEN mirrors $yen from 1wk-1m as the term structure is very similar for eur vs usd (no significant event vol expected). Though we see a notable 6-7vol divergence in the current vol which is expected as $Yen expressions are favourable for BOJ out-performance positionings (USD a firmer based/ more widely traded) and £Yen are favourable for BOJ under-performance structures as BOE next week compunds the attractiveness in the downside of the cross (BOE likely to ease) which in turn increases the demand for £Yen expression on a BOJ no-show. 25Delta Risk Reversals (25d call vol minus 25d put vol - examines the relative demand) USDJPY - - $Yen RRs are +3 mrkt, +0.62 1wk, -0.67 2wk, -0.81m - Interestingly we are seeing a moderate $Yen topside coverage in the front end (e.g. current and 1wks) implying the market is hedging/ positioning for a BOJ Out-performance Surprise (call demand > Put). The RRs are quite small at +1 so i wouldnt say there is a huge consensus on BOJ HIT expectations. Nonetheless calls are likely being purchased to hedge underlying spot short positions in the near term as any $yen/ BOJ topside is expected to not last long and be faded aggressively - which explains the switch to negative RRs after the BOJ/ MOF events have passed. GBPJPY - - £Yen RRs are -6 mrkt, -3 1wk, -1.3 2wk, -2.2 1m - Understandably SterlingYen has a different RR structure as BOJ and BOE predispositions are priced into option structures, rather than just BOJ (as is the case for £yen and euroyen) - so we see a strong put bias, particularly in the front end (current and 1wks) as these cover the BOE and BOJ event vol. Unlike $Yen we see there is a clear trend for BOJ miss/ downside speculation as it is the logical chosen proxy, as a BOJ miss is highly likely to then be compounded over the current and 1wk terms as BOE hit expectations are priced in, accelerating the GBPJPY to the downside and RRs towards the LHS (BOJ miss = yen strength, BOE hit = Streling weakness - aggressive downside). Also put gbpjpy, automatically hedges any BOJ hit/topside risk as 1wk later the BOE is likely to ease so any yen downside arising from a BOJ hit will likely be smoothed somewhat by BOE easing induced GBP selling; thus lessening the negative impact or even turning the position back into the money.
by QuantumLogicTrading
6
GBPUSD SHORT: BOE/ FOMC POLICY EXPECTATIONS INCREASINGLY BEARISHFollowing today's Service/ Manufacturing PMI miss (worst contraction in 88 months - since 2009) the Sterling market has come under significant pressure as BOE rate cut expectations increase with OIS rates markets pricing a 94% chance of a 4th Aug cut vs 85% before the PMI's were released. Further, the PMI misses has attracted attention from UK Politicians e.g. Chancellor Hammond - which puts further qualitative pressure on the BOE to cut, rather than just quantitative data prints - Political pressure combined with data pressure is the best us GBP sellers can ask for when looking for a BOE rate cut. I have to say this is a breath of fresh air for GBPUSD shorts that i am holding (cable trades down to 1.30xx) - given that the start of the week was the complete opposite, with strong CPI/ Employment and Hawkish comments from MPC members Weale and Forbes; all of which reducing the pressure on the BOE to cut and thus the sterling market. Below also, following the PMIs we see Aug 4th BOE expectations from BoAML/ JPM - which call for a 25bps cut and 50bn addition to QE (with increased near-term pressure to do so/ act post-PMI) - in which imo will send GBP$ to 1.25, if not through - these expectations are encouraging for shorts thougb it should be remembered the cut was expected in July also but didnt materialise (though the minutes from the meeting did state "most members expect to ease in August". Further we see fresh recession concerns emerge as from Barclays below - once again putting downside pressure on GBP through poor GDP and increased BOE cut likihoods. Further, on the USD side of the trade, in this risk recovery we continue to view FOMC rate hike expectations rising - aiding dollar topside (and gbp$ downside) - as Fed Funds Futures Opt Implied probs now trade at 19.5% for Sept, 20.8% Nov and 40% for Dec, up from yesterday at 18.8, 20 an 39.8 - the risk-on bias already started today will likely see these probabilities continue to strengthen through the end of the day. Trading Strategy: 1. So from here after holding shorts at 1.3400 average, given this fresh and extreme impetus for downside - I will continue to hold my cable lower to the 1.285 target (unload 50%) and save 25-50% (depending if i unload 25% at the 1.305 level) for the Aug meeting itself where 1.25 is likely - where before today holding cable seemed more risky as the risks looked skewed to a hawkish BOE, which now has flipped. Unlikely, but any rallies to 1.33-35 level i will be reshorting - cable downside is a function of time imo. - I like holding short because BOJ are likely to ease, whilst the FOMC stay neutral/ Hawkish, this in turn puts more pressure on the BOE to ease/ GBP - in order to prevent GBP appreciating vs JPY (disinflationairy) BOE must ease too & hawkish FED stance puts pressure on GBPUSD lower. - Risks to the view continue to be if 1) New/ Weale/ Forbes continue to reiterate their hawkish/ no easing stance and perhaps less impactful; 2) Next weeks UK GDP reading - will not contain much Post brexit data so any upside is unlikely to give GBP strength, though downside is welcomed and could cause further selling (Low pre-Brexit GDP gives BOE more reason to cut) GBP OIS PRICING A 94% CHANCE OF A 25BPS CUT FROM THE BOE IN AUGUST (85% PRE PMI) - UK CHANCELLOR HAMMOND: Must restore uncertainty after July PMI - UK CHANCELLOR HAMMOND: BOE will use monetary policy tools at its disposal - UK CHANCELLOR HAMMOND: BOE have tools to respond to market turbulence in the short-term BoAML ON BOE: - We look for the BoE to cut rates 25bp and increase QE by £50bn in August, split between Gilts and private sector assets. - BoE inaction so far and heightened policy uncertainty leaves risk-reward unattractive in the front end in our view. - We prefer to position for potential BoE Gilt purchases, reiterating our 5s20s Gilt flattener as attractive in a QE-scenario. JP MORGAN ON BOE: - Current market pricing of a 25bps rate
Short
by QuantumLogicTrading
2
SHORT EURUSD: MISPRICING ECB & FED POLICY/ FUTURE POLICY/ BREXITThe Gross underpricing of ECB and FOMC Monetary Policy Changes - A fully-priced medium-term equilibrium Lower coming? EURUSD: *Short EURUSD 3m-12m Duration: 1/2lots @1.11 - 1.07TP1; 1.04-5TP2 1.01TP3 1. On Decemeber 2nd the ECB cut their rate by 10bps to 0.05%, paradoxically this actually caused EURUSD to rally higher. Thus this is a mispricing as Reductions in CB interest rates send currencies lower as 1) it reduces the demand for the currency as hot money flows, seeking higher rates, falls and; 2) Increases the Supply of the currency as at lower interest rates, banks borrow more and lend more, which in turn (through the bank/ credit multiplier) increases the EUR money supply. - So reduced demand + increased supply = EUR should have a lower value, so EURUSD should have fallen. Instead EURUSD actually rallied 350pips higher to 1.095 on the day - so this policy action has been underpriced - Though it should be noted that the reason EURUSD didnt fall was because going into the Dec ECB meeting expectations of Draghi were priced at 15-20bps of cuts so since he "failed" the market reacted hawkishly/ buy EUR. 2. On Dec 16th the FOMC increased their rate by 25bps to 0.50%. For the same, but opposite, reasons above this leads to increased USD demand and reduced supply. - so the net impact should be aggressively increased USD strength, however, EURUSD only fell by some 100pips before days after erasing these gains to 1.08 back to 1.10 - so this policy action has been underpriced . 3. On March 10th ECB cut their rate to 0.00% or 5bps and extended their QE programme by several EUR100bn. This once again reduces EUR demand and increases EUR supply (even more so as QE is combined). - So the net impact once again should be for EUR weakness to be priced in and EURUSD to trade much lower. However, once again paradoxically on the day EURUSD actually traded HIGHER? from 1.10 to 1.12 - so this ECB policy action is the third CB action to go UNPRICED in EURUSD 4. On the 24th of June the UK voted to leave the European Union in a shock Brexit vote - now given that it was a shock vote, EUR should have traded aggressively lower as one of its strongest countries voting to leave its economic union 1) weakens the E.Unions GDP/ Employment/ Inflation status as the UK leaves; 2) Causes uncertainty regarding the new trade agreements between the UK and itself, especially given that the UK is one of the regions biggest export markets; 3) causes uncertainty regarding other nations leaving - a run on the EU could develop.. currently several more nations have called for a vote. - So all in all the Brexit result is negative for the economic stability of the Euro area and as a result this should reduce demand for EUR as investors fear the worst/ choose safer currencies. Reduced EUR demand should cause EURUSD to trade lower - it took a 200pip loss to 1.118 - 200pips of downside is not enough to price perhaps the most uncertain event possible for the EUR (800pips more suitable given UK is 16% of the eurozone).
Short
by QuantumLogicTrading
2
TRADING CORRELATION PT 2- GBPUSD: SHORT CABLE ON NEG EUR$ CORR XOn the 1D time frame, a strong positive correlation relationship emerges - where previously on the 4h time-frame the correlation looked relationship-less and "noisy". However, looking back at the Daily correlation over the last 2-3 years for GU and EU one noticeable and significant trend emerges - A steep fall in correlation, either from positive-lower positive, or positive to negative, is historically ALWAYS followed shortly by a plummet/ Sell-off in GBP$. Thus as we see below GU v EU correlation has been descending and has just turned negative - so in my opinion we should consider selling GU as if history holds true an aggressive sell off on the daily is close by . *please see next article where i confirm this trend by looking at the Daily zoomed out*
Short
by QuantumLogicTrading
1