No rest for the wicked.
China causing all sorts of problems and we only 2 days into the new year. After yesterday’s blood bath Chinese stocks rallied 1% after initially falling over 3% again at one stage. One cause for the volatility in China’s markets is investors’ uncertainty about how the stock regulator will handle a ban on selling by large stakeholders which is expected to expire on Friday. Analysts estimate the ban, one of the many bailout measures introduced during the summer stock crash, could free shareholders up to sell around 1 trillion yuan of shares ($152.96 billion), a prospect that triggered a steep selloff Monday and which caused markets across the globe to sell off. On Tuesday before China markets opened, the stock regulator aimed to quell investor worries, saying such large scale, coordinated selling was “unrealistic,” and that more guidelines would be announced later in the day. Global stock markets have reacted to the news climbing over 1% at the open. No doubt this story will continue to plague the markets and further extreme volatility is likely.
The USD claimed victory on Monday (and this morning) with the EUR(USD) falling 1.50% while the GBP(USD) fell 1% thus resulting in EUR(GBP) falling from 0.7425 to 0.7345. In other words we now have a situation where we not only have the USD rallying as a result of the US-EU interest rate differential (prospects) and economic growth, but also the Chinese growth issue. For FX traders this is manna from heaven (volatility = opportunity). FX volatility has as a result climbed (1%) from the close in December with EURUSD 1m now 10.20/10.50, 3m 10.05/10.20 and GBPUSD 1m 8.35/8.75 (+0.75%), 3m 8.50/8.90 (+0.65%) and 1y 10.40/10.55 (+0.25%). Option traders are looking for continued volatility over the coming weeks and if my projections are right about PARITY (EURUSD) over the coming 6-8 weeks, you can expect the levels above to climb higher. No doubt the uncertainty surrounding US interest rates, EU economics, and Chinese growth (demand) will continue to play havoc in the FX markets.
EM currencies as I have noted many times will bear the brunt of the USD strength with the likes of the ZAR, TRY, MXN, BRL, and NGN already starting to show signs of further weakening. Not a pretty sight. ZAR FX vol stands currently at 1m 17.75/19.00 and 1y at 18.50/19.75 – TRY 1m 13.00/13.75 1y 14.50/15.50 and teetering on the edge.
Volatility is here to stay!! Prepare yourself for further EM losses and USD gains. It the norm.
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