Weekly implied volatility matrix and key event risk playbook
*My colleague Sean MacLean and I put this short video together on the US election, key dates to familiarize yourself with and the connection with markets. Take a look – https://youtu.be/kYM3jnclYL8
At this early stage, the FX open has been a rather quiet affair despite the EU Summit having given us little to work with. I have no firm intel on when we get full confirmation and the outcome from the three-day talks, but needless to say, if leaders don’t emerge without some sort of agreement soon, or least offering a strong belief that one is coming in the months ahead that the EUR and EU equities could be disappointed.
EUR implied volatility (vol) has been rising of late, as we can see this in the weekly implied volatility scan, with EURUSD 1-week vol pushing into the 32nd percentile of the 12-month range. This puts EURUSD in an expected range this week of 1.1523 to 1.1303, with a 68% level of confidence. Once again last weeks implied move/range offered a solid guide for mean reversion traders, or those just looking to manage risk more effectively.
(Weekly vol matrix)
Traders were net buyers of the single currency on Friday into the EU Council meeting, with EURUSD testing 1.1447 – a level I’ve marked as core to markets – a weekly close through here could hold huge implications for global markets and take the USDX through 95.78.
EURGBP is also getting some good interest, with price having pushed into 0.9134 and through the 14 July high, before closing below the high – I have this on this cross on the radar and if this kicks higher through trade I would be inclined to jump on board – a big if, when we’re dealing with a headline-driven market this morning.
Options traders extremely neutral on future gold moves
Gold is on the radar too, with the USD firmly at the centre of the thought-process today.
Moves today should be sanguine, and if I look at the options markets I see 1-week implied volatility falling to a 7 vol discount to 1-year vol – the lowest since 2013 – showing a belief that near-term moves in gold will be incredibly subdued and a grind. I also see 1-week risk reversals at 0.56, and 1-month risk reversals at 1.015 – effectively, the options markets is about as neutral on the metal as I have seen in some time – a move through 1813, and into new cycle highs, possibly changes that dynamic and see traders looking for a more explosive move in price.
Still upbeat on equities but fiscal debates offer new challenges
On the index side, the weekly chart of US500 looks constructive, and despite earnings season ramping up this week, the feel the technical side is suggestive of further upside. The risk for the market this week is on the fiscal side and equities could be sensitive to the news flow and one suspects it will not be smooth sailing.
Staying in the vol space and we see equity vol headed lower, with the cash VIX -2.3 vols on Friday and into 25.68% – closing below its 200-day MA, which is something it failed to do throughout the various tests in June. Our VIX index tracks the VIX futures and is approaching the June lows – one to watch as lower equity vol is saying we’re moving into the US summer doldrums and is having an effect in FX markets.
What’s on the docket this week?
As suggested, the tone in broad markets will most likely be set on the fiscal side, as is the case in Australia too (see Wednesday). On Monday, the US fiscal debate ramps up, with Congress back after the two-week recess. A Phase 4 fiscal package is only a draft, and is not expected to pass until August and will need to be agreed by Senate Republicans and then obtain the Democrats blessing. Expectations are for a package of around $1t, but it would not shock if the package came in closer to $1.5t, with Trump wanting to tie in a payrolls tax.
There are a number of focal points – extending the $600 p/w unemployment benefit (known as Pandemic Unemployment Compensation) – or more pertinently whether this is reduced to say $400 p/w. A payrolls tax cut, which as I say is a feature Trump is pushing for and will face strong opposition from Democrats which could make a fiscal package a tough slog. We could also see new consumer stimulus measures, such as a new round of stimulus cheques or travel tax credit. Also, there will be a focus on State and Local government Aid.
Fiscal aside, we also get results from the Oxford University/AstraZeneca vaccine trials and the results are expected to be a positive for markets. How much is in the price though?
It is also a blackout period for the Fed, so there will be no Fed speakers this week ahead of the July FOMC meeting next Wednesday (Thursday 04:00aest).
China – release potentials changes to its 1- and 5-year prime rate (11:30aest). No change to policy expected here.
Australia – RBA minutes (11:30aest), with RBA Governor Lowe speaking at 12:30-aest, in a speech titled “Covid-19, The Labour Market and Public-sector Balance Sheets.” With Metro Victoria in lockdown, the market will be interested in the bank’s views on the recovery have shifted.
Australia – The Australian government release its Economic and Fiscal Outlook. This is a key event risk for the AUD as the govt will offer not just an update of the government’s budget projections, but on the next phase of stimulus measures. Expectations are for a package north of $40b, including an extension to Jobkeeper and Jobseeker, personal tax cuts and cash handouts. I would hesitate to believe it will be a volatility event for the AUD, but it’s one that will be well watched.
Canada – June CPI (22:30aest) – consensus is for 0.2% YoY, 0.4% MoM.
US – initial jobless claims (22:30aest) – consensus 1.29m.
UK – June retail sales (16:00aest), Markit UK manufacturing and services PMI (18:30aest)
Europe – Markit EU services and manufacturing PMI (18:00 aest). The market expects expansion on the month, although the German numbers (released 17:30aest) could impact that, with expectations the diffusion manufacturing index prints 48.0 (from 45.2)
US – Markit US services and manufacturing PMI (23:45 aest) – this data point gets quoted a bit but rarely moves price, with the market more sensitive to the ISM manufacturing read (the next one falls on 4 August)