A look at the key focus areas in the market today

I’ve covered the
negative rates story in some detail the last two days and this time around it
was down to BoE Gov Bailey to focus on the debate.

Bailey did go
somewhat against his deputy’s recent comments, with the governor pushing back
on negative rates, saying it wasn’t something the bank was contemplating and
channelling his inner Powell. Like Powell, he left negative rates on the table as
a potential option, and just like the US, the UK will need to be in a far worse
spot to see them being utilised. 

UK rates did respond
to Bailey’s comments, with 1Y1Y forward swaps going from -1.4bp to +0.5bp, with
small selling seen in UK gilts. That said, front-end gilt yields are still
negative, and this won’t disappoint the UK government who have over £300b
borrow this fiscal year.

GBP has been fairly
well traded, with GBPUSD trading into the 7 April low but rallying back to the
flat line, to print a hanging man doji – Today marks an interesting session
then as a kick higher could see price re-re-establish a firm footing back in
the 1.2650 to 1.2220 range. That said, we could easily see price roll over
and start to trend lower.

ready to break out of the range?

EURGBP has been in
focus, with the 21 April and range high of 0.8864 in play – do the range
traders kick this one lower through trade today? That is one for the radar, and
I am reactive here, but an upside break would attract some attention. 

Consider EURGBP vols
are subdued here, with 5-day realised at 8% (see chart below) and 1-week
implied at 7.7% – So the market expects a grind in price, and not explosive
break higher and this has implication for position sizing.

PP2(Source: Bloomberg)

GBPJPY has also seen
some flow, with price having a failed break of the May double bottom, which
I’ve shown on the 4-hour chart. You can see the defence of the May low, and
this is always why I wait for a period (ideally daily) close through a level to
confirm that the market is ready to extend in that direction.

That said, on the
daily, the 5-day EMA is headed lower and the UK is making a dog’s breakfast of
exiting lockdowns, so a close through 130.60 would be a sell signal, in my

Again, we can look
at the options market and eye vols in GBPJPY, as this can be a fair proxy of
risk, although most tend to look at AUDJPY, USDKRW and EURJPY as our guide

GBPJPY implied vol
has ticked up a touch, but to give you a sense of the expected move, options
traders see a range (over the coming five days) of 132.67 to 129.65. The daily
implied move sits around 82-pips, which is a discount to the 5-day ATR of
131pips. We also see GBPJPY 1-month risk reversals at -2.63 vols.

In layman’s terms,
the options market holds a downside bias in spot, with GBPJPY 1-month put
volatility trading at a premium (of 2.63 vols) over calls, which shows the
market has paid up for puts (bearish) – this skew has come in from negative
8.99 vols back in mid-March. 

(GBPJPY 1-week implied volatility)


EURCHF has also
garnered greater attention. I put this on the radar yesterday, and we have seen
price come down to 1.0504. We saw a break of the recent series of lows, which
has clearly been supported, with the buyer(s) coming back in on the break. The
fact we have seen a broad risk reversal has presumably helped. Whether a future
downside break leads to a stop run is a point of debate, but it is a risk.

My own view is the
SNB will not pull the rug from under the market, and comparisons to 2015 are probably
misplaced, not just because of the duration of this move, but in 2015 there
were billions of dollars of stops under 1.20 and no one had
expected the SNB to pull the floor. 


moves in energy

Elsewhere, we’ve
seen a solid bid in crude, backed by a mix of OPEC cuts kicking in, with
exports reduced to 5.96m for the first 14 days of May. Saudi cut sales to the
US and Europe by half, while positive comments from the IEA about an
improvement have also helped. A drawer in the weekly DoE inventory report would
not have hurt either! 

Either way, it’s no
surprise that the MXN and CAD have performed well, and the fact we’ve seen a
strong turnaround in equity sentiment, with S&P500 futures rallying a lazy
3% off the session lower. Naturally, this has offer support to risk FX, with
AUDUSD lifting from 0.6404 into current levels. 

ready to break out

Gold has also seen
solid flow, with price pushing into 1736 and the top of the range. I identified
this range high in my recent piece on gold and feel the flow of capital is
looking pretty good for gold and silver –  “The Japanification of the US – the truly bullish case for gold”
 I would be looking at the fact that ‘real’ (or
inflation-adjusted) rates have pushed a touch lower has also helped, not to
mention further talk of fiscal stimulus which will only increase the deficit.
The bulls look to be in control here, and I expect an upside break to get
plenty of attention from clients. 


This article was submitted by Market Analysts at

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