Good morning, hope you had a good weekend
As I mentioned in some of my @Parityfxplc TWEETS, now that the 2 main CB meetings are out the way, market participants are going to be looking for the next “big story”. This week economic numbers are on the “soft” side in that other than various European & World PMI (purchasing manufacturers index) and German IFO Business Climate index (prev 110.4 exp 110.2) there is not much else to get excited about. Don’t get me wrong everything that comes out matters, it is just the importance and significance of the number that I refer to.
Gov Carney will be speaking again tomorrow (Tuesday) at 9.30am so we need to keep a watch on that. But let’s face it. What else can he say that we don’t already know. The reason for my confidence in saying this is if one looks at o/n GBP vols currently being quoted 4.25/7.00 this represents a number that says nothing new expected and no fear factor required. The options market is therefore happy to sell o/n options cheaply as they do not see this as a risky trade. Remember, the higher the volatility number the greater risk the market is applying to that event. So for example the day before the last FOMC meeting, o/n EUR vol was trading around 10% from its normal 3-5%. In other words the market is happy to buy insurance and charge a greater premium if it gets “paid” by the clients. All in all having come in this morning and taken a look at the vol surfaces across the “actively” traded currency pairs, nothing really stands out. Vol are a touch higher this morning compared to Friday’s close, but the reason for that is the weekend factor (2 days of paying time decay/theta) is taken out the equation.
So what now for the currencies…lets discuss a few
EUR/USD – Once you get to know me and how I think you will know that at times I am like a dog with a bone. I don’t let go, and so once again I will reiterate what I have said before, I really think Q3-Q4 will all be about the USD and I see the currency moving and breaking 1.3000 by year end. Yes, medium term projections but for me to take advantage why not do a calender spread, selling 2x 1-2m VS buying 1x 4-6 months and so leg into the trade. If not 2×1 then how about 1×1, but remember you will have negative gamma but positive theta which in this environments works.
GBP/USD – trading close to a five year high, and one of stars of the show. GBP has been supported by the recent CB policy outlooks and any aim to try dampen this will fall on deaf ears. You can’t pull the starters gun and then call the racers back half way down the track. Clearly there is shift at the BOE, and they have laid the groundwork for this to prepare us for the inevitable. Until we hear something from Carney tomorrow I suspect GBP will trade sideways within a tight range. 1.6985 remains key support while 1.7045 remains key resistance. Breaks of either will see an easy 50-75 pip move in that direction.
EUR/GBP – for many people remains a “hot” ticket. Speaking to various GBP traders we all appear to be thinking along the same lines that GBP will rise against the EUR over the coming year. One cannot predict that rise of course but critically 0.7920 0.7850 0.7775 and finally 0.7700 are some of the opinions. I think 0.7920 needs a clean break. Putting the numbers together if we do see 1.3500 (€-$) and say 1.7000 (£-$) that’s equivalent to 0.7940…so I guess you see my point.
Wishing you a great week ahead.