The Daily Fix

Trader thoughts – calmer heads prevail ahead of todays RBA meeting 

The feeling on the floor is that energy is in a better spot, and while it’s not brilliant, the supply/demand equation is starting to shift in a more positive direction. Certainly, while the bulk of open interest has swung to the July WTI futures, the contango in the front of the futures curve is certainly coming out of the market and we’ve seen an 18% swing off the earlier low in June WTI futures. Brent crude is also having a better time of it and the $30-level is a clear target.

The S&P500 Energy sector (+3.7%) has outperformed, with the S&P500 cash closing +0.4, in which is a small victory for the bulls who have seen S&P500 futures swing 2% off its low seen in early Asia trade. The NAS100 powered ahead, with a close 1.3% higher. This certainly has validated the bullish stance from ASX 200 participants who piled into the market early, despite the Hang Seng and Kospi trending lower throughout the day, while the China A50 index came well off its earlier high. The irony being energy was the worst performer in yesterday’s ASX move, and today, in what looks like a somewhat positive open for the Asian markets that are open, energy could lead the charge.

Investors shying away from EU assets 

European markets closed over 3% lower, although the FTSE100 fared comparatively well, with a loss of 0.2% and DAX and FTSE futures are circa 70bp higher from the cash close – so we’ll see how Asia trade affects EU futures, although mainland China and Japan are offline for holidays. EURUSD has been offered really since the Monday FX open, and the tape shows a steady bleed. We saw some poor EU PMI’s, and a few traders are pointing to concerns of holding EUR assets into today’s German constitutional court ruling (expected 6pm AEST/9am BST) on whether the ECB’s bond-buying program is legal. This is non-binding for the ECB but is binding for the Bundesbank.

I am certainly no expert in the German legal system but a vote for the program would show solidarity and togetherness, which is clearly needed. One could argue a vote against the legality of the bond buying is a EUR positive as it has implications and headwinds for the future expansion of the ECBs balance sheet. However, the counter argument is it would re-enforce the brittle political fabric of the EMU and just push capital out of the region, thus being a EUR negative.

There certainly hasn’t been much concern expressed in the interbank markets, with Euribor-OIS, remaining unchanged at 20.4bp, despite EU Stoxx bank index eyeing a re-test of the 50-handle – expect this to get some attention should this downside break materialise.

Staying In FX, and while weakness in the EUR has helped lift the DXY, the positive swing in both WTI and Brent crude has seen a nice reversal in high beta FX and justified the move late last week from options traders to leave FX vol well alone. Certainly the session has belonged to the MXN, but the NOK and CAD have worked well too, with EURNOK one on the radar, where a break of the 50-day MA with a move through 11.052 would get my attention from the short-side.

The likes of AUDUSD and AUDJPY have looked at the move in the S&P500, and USDCNH, with the latter finding better sellers through late Asia trade and would have not gone unnoticed by those buying S&P futures. The FXI ETF (China large-cap ETF) has ground higher, closing up 0.9%, mirroring the move in the S&P500, where calmer heads have prevailed and not reacted to news that the Trump Administrations is ‘turbocharging’ a plan to remove global supply chains from China ( that may still come but for now, traders are not reacting and we’re seeing vol sellers, with the VIX -1.02 vols at 36.17%.

The RBA meeting in focus 

AUD traders will be keeping an eye on today’s RBA meeting, although AUDUSD overnight vols are not particularly elevated at 20%, but will likely push higher as the session cranks up. The implied move on the day is currently 61-points (higher or lower), so factor that into risk and position sizing.

(AUDUSD overnight volatility)

It’s hard to disagree with the options market that today’s meeting is unlikely to be a vol event, so if running AUD exposures, it may not be a landmine I would be wholly worried about and subsequently reduce my position into. I guess if anything, the balance of probability resides for modest AUD upside, as I think the RBA is fairly happy with what they are seeing play out with the Aussie 3-yr below 25bp. At the same time, the overnight rate sits at 14bp and below the cash rate, while BBSW-OIS is negative and the lowest levels since 2002.

Friday’s RBA Statement on Monetary Policy is on the docket on Friday, although the AUD is more externally focused, taking its variance from the CNH and equity index futures.

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