The week ahead playbook and implied volatility matrix
I had a conversation with Blake Morrow of Forexanalytix on Saturday detailing the risks we see a period of higher volatility and uncertainty in markets, before a tactical run up in risk in Jackson Hole and the September FOMC. Take a listen, Blake is a great follow on Twitter for those who use it
Macro themes to focus on:
- US fiscal negotiations – having passed the expiry of unemployment benefits, we eye this Friday’s ‘soft’ deadline before Congress heads to Summer recess, although there is the option to keep talks going until Monday 10th. Reports (on Sunday) suggest that House Speaker Pelosi and White negotiators are still someway apart on restoring the $600p/w jobless benefits and that won’t inspire. The prospect of an agreement on fiscal is still consensus, but should we push close to the deadline without a deal then we could easily see higher volatility and drawdown in risk assets.
- Global COVID cases continue to rise. In the US we see the 7-day average of the daily cases count plateauing and will hopefully roll over, but the mortality rate has been trending higher since early July.
- In Australia, the focus falls on the likely impact on sentiment from Melbourne moving to Stage 4 lockdown restrictions, with a focus on the case count in NSW. It’s unlikely the actions impact the AUD to any great extent, but it may impact the ASX200 at a time when FY20 earnings start to roll in and valuations are sky-high.
- US-China relations – We’re hearing that Trump is set to announce an array of measures against Chinese-owned software companies, with much focus on his plans to ban TikTok.
- US election updates – With Trump around seven percentage points behind in the polls, the election continues to be a headwind for the USD. Trump’s approval rating has improved somewhat of late, where the approval rating has had a reasonable correlation with the USDX since 2017. We should hear more on Biden’s running mate this week.
- USD moves – Will the USD make a resurgence? On Friday we saw the USDX engulf the body of Thursday’s move, just failing to close above the high and 5-Day EMA. On positioning, we saw the CFTC report that non-commercial accounts are running a net USD short position of $24.5b or -6727 contracts, although leveraged accounts are still long, and asset managers are running a chunky net short position (mostly vs the EUR).
- Can gold claim the $2k level? A lot will depend on moves in real Treasury yield which continue to head ever deeper negative. My gold sentiment guide has not given any bearish signals just yet and I am happy to hold a bullish bias, believing pullbacks will prove to be shallow and $2k is likely.
Implied volatility matrix – looking at the implied range with a 68.2% degree of confidence and 80% (the outlier move).
Event risks this week – risks highlighted in blue are deemed to be a higher risk event for traders.
China – Caixin China PMI manufacturing (consensus 51.1 from 51.2) and services (57.9 from 58.4) – both are released at 11:45aest and shouldn’t move markets too greatly – unless they miss the mark by a margin, which is typically unlikely with China data (ex-trade balance).
Eurozone – Markit July final manufacturing – no change expected at 51.1 – this is the final revision, so it’s unlikely this or the individual countries (that blend the aggregate number) will be a volatility event
US – US ISM manufacturing (00:00 aest) – consensus 53.5 (from 52.6) – usually a big-ticket item for markets, and historically correlate well to Treasury yields. Watch the forward-leaning sub surveys such as new orders and new export orders. I see a bigger move to markets on a decent miss than beat.
US – Fed gov James Bullard, Thomas Barkin and Charles Evans speak on the US economy (02:30, 03:00 and 04:00 aest respectively)
Australia – Trade balance and June retail sales (consensus +2.4%, both 11:30aest). The August RBA meeting (14:30aest) – The Melbourne Stage 4 lockdown raises the risk of easing again in the future, although the focus falls fully on the prospect of fiscal support. If NSW follows suit down the line, then the rates market and AUD will start to factor in some sort of easing, although it seems unlikely to come from interest rates.
Large focus of the meeting will be on whether the RBA dial up the concern in their language. Consider the RBA will have factored in any economic changes (from Friday’s Statement on Monetary Policy) into their statement, although few expect any market-moving changes in their guidance.
Germany – June factory orders – consensus +9.7% MoM
NZ – Q2 employment report (08:45aest) – employment change -2% QoQ, -1.1% YoY, unemployment rate 5.5%.
Canada – Markit July manufacturing PMI (23:30aest) – no consensus has been offered
US – July services ISM (00:00 aest) – consensus 55.0 (from 57.1)
US – Fed member Loretta Mester discusses the US economy at 07:00 aest
NZ – (Q3) 2yr inflation expectations (13:00aest)
UK – BoE policy meeting (16:00aest) – the debate about negative rates is still somewhat in vogue, while swaps are pricing a low in rates of -8bp, but not for until 2023. That said, there is a belief the bank offers a dovish signal, possibly opening the door for rates taken to zero in the November meeting, with possibly more QE. GBPUSD has printed a bearish hammer on the daily, and a lower low could indicate the market ready to close a stretched long position into this meeting.
US – weekly jobless and continuing claims (22:30aest) – consensus 1.41m and 16.94m respectively. While some talk about seasonal effects, the fact that continued claims look sticky above 17m is a worry.
Australia – August Statement on Monetary Policy – we saw some punchy downgrades to the RBA’s economic forecasts in May, with GDP expected to contract 10% in 1H20, with unemployment hitting a high of 10% in 2H20. Most now expect small upgrades to GDP, inflation and employment from the RBA’s May outlook, but with the market looking forward at the risks posed from the Melbourne shut down and the impact that is having on the mood that is having at a national level, one questions how impactful these revisions proves to be.
China – July trade data (no set time) – imports (consensus in USDs) +1%, exports -1.2%. Q2 Current account. With no set time these numbers rarely cause an immediate impact on USDCNH or China proxies (such as AUD or NZD). Always interesting for the global growth story, but unlikely a market mover.
Germany – June trade balance and industrial production (16:00aest) – industrial production (consensus +8.1%) could move the EUR, but it’s good for 10-15pips in EUR, depending on the outcome.
Canada – July net change in employment (22:30aest) – consensus 390k, unemployment rate 11.2% (from 12.3%), participation rate 64.4%
US – July non-farm payrolls (22:30aest) – consensus is for 1.57m jobs to be created (economist range +3.21m to -500k), the unemployment rate at 10.5% (from 11.1%), average hourly earnings +4.2% YoY. This is the marquee economic data point for the USD this week and poor numbers will go some way in causing risk aversion. Look for the USD to outperform the AUD, NZD, CAD and EM FX on a poor number. Moves vs EUR, CHF and JPY are less obvious though, as we could see USDJPY trade lower on risk aversion. It would certainly shock to see a negative print, but it’s not out of the question.