A traders' playbook - US banks take centre stage
On the theme of volatility (vols), we see a calm has descended with implied volatility in FX, and equity markets coming off sharply – we see G10 FX implied vols at the lows of their 12-month range and the VIX index into 17%.
Clearly, the close-to-close moves in broad markets are coming in lower and that is affecting the pricing and expectations of future movement. That said, the intra-day trading ranges are still offering enough for the day traders to work with, and that has implications for how much risk traders take on (i.e. distance to stop) and position size.
There is a fair conviction in the volatility markets to suggest this week’s known event risk will not create explosive moves, but it is also reflective that both the market and G10 central banks are moving into the pause phase of the cycle and are fully data dependant – we need new trends in the data to push interest rate pricing around, which would subsequently cause volatility to pick up.
The USD gets centre stage this week. While the US data flow is low-key, we’re in an environment where the market could pick and choose what it wants to react to – I suspect it will be the news flow from the US banks that could influence the USD, where good news could see rate cuts being priced out for 2023 and the USD rallies.
I question whether the bullish USD flow we saw on Friday can extend through this week. There is divergence playing out on the daily, and a break of the bear channel (in the DXY) could see USD shorts cover hard. The USD bulls can see there is real work needed to get this pumping, but the risk-to-reward trade-off is shifting it seems. A higher USD would certainly weigh on gold and be a headwind for equity markets too as we look more intently at US earnings.
Keeping an eye on 4150 in the US500, as a closing breakout here would get a lot of attention, and longs remain the pain trade. It's hard to short at present but the USD could play an influence this week.
Marquee data to drive markets
- Thursday – Fed’s Beige Book (04:00 AEST) – the Beige Book hasn’t been a market mover of late but as the market becomes ever more sensitive to data, the narrative on economic trends could impact this time around.
- Thursday – Initial jobless claims (22:30 AEST) – The consensus sits at 240k claims, which would be in line with the 4-week average. A print above 260k would get some focus and could bring out the USD sellers
- Friday – Leading Index (00:00 AEST) – The market expects a contraction of 0.7%, which would signal the rebound from the October lows is over. The recession callers will be eyeing this one closely, where the market may de-risk more intently on a print of -0.9%+.
- Friday - S&P global manufacturing and services PMIs (23:45 AEST) – the market sees a slight deterioration here with the manufacturing diffusion index eyed at 49.0 (from 49.2) and services at 51.5 (52.6). Hard to know if the market will run with this data point, but a surprise print below 50.0 on either metric may be tough to ignore and result in USD selling and gold buyers.
- Tuesday – UK employment report (16:00 AEST / 07:0 BST) – the consensus is for the U/E to remain unchanged at 3.7%, while wages are expected to fall to 5.1% (from 5.7%). With 21bp of hikes priced for the May BoE meeting, GBP may have a limited move on this data point, unless we see a big miss to the consensus expectations. Small bias for GBPUSD short, with 1.2344 the level I would want to see price break for a move to 1.2200. GBPCHF has been well traded of late and approaches the bottom of its 1.1050 to 1.1500 range seen since October.
- Wednesday - March CPI (16:00 AEST / 07:00 BST) – One to have on the radar, with the market eyeing headline inflation at 9.8% (from 10.4%), and core CPI at 6% (6.2%). A 10-handle on UK headline inflation would surprise and could promote solid GBP buyers, with the market increasing the odds of a further 25bp hike in June. A print below 9.5% could see the market bring down its pricing of a May hike closer to 50%.
- Wednesday - CPI (19:00 AEST) – the market sees the revision of headline inflation unchanged at 6.9% (6.9%), and core at 5.7% (5.7%) – given the conviction from the market of an unchanged read, this shouldn’t move the EUR too intently – obviously, therefore, a solid upside revision would shock and boost the EUR
- Friday - S&P global PMIs (18:00 AEST) – The view is we see modest improvement with the manufacturing diffusion index eyed at 48.0 (from 47.3), while services may grow at a slightly slower pace at 54.5 (55). EURUSD 1-week implied volatility sits at 13th percentile of the 12-month range, so the market is largely feeling this will not shock.
- Tuesday – Q1 GDP (12:00 AEST) – the consensus is Q1 GDP comes in at 3.9% (from 2.9%), while industrial production is eyed at 4.7% YoY, retail sales 8% YoY and fixed asset investment 5.8% YoY. I rarely focus on GDP given its backwards-looking nature, but I question if the market will look at this more closely as we look to China as a source of growth in 2023 – obviously, this coming off a low base, but good news here and the HK50, CHINAH, AUD and copper may find a bid.
- Tuesday – RBA minutes (11:30 AEST) – the market will get a deeper dive into the RBA’s call to keep rates unchanged at the April meeting. I’m not expecting this to be a major vol event as we look more intently at the Q1 CPI print on 26 April. With 6bp of hikes priced for the May RBA meeting, pricing portrays a conviction the RBA are on an extended pause – hard to see the minutes really altering that stance.
- Tuesday – CPI (22:30 AEST) – the consensus is for headline CPI to drop to 4.3% YoY (from 5.2%), and core CPI at 4.4% YoY (4.8%) – The market is looking for an extended pause on rates from the BoC, so to promote a solid move in the CAD we’ll need to see an outlier print (vs consensus) – CADJPY longs has been well traded of late and is seeing a good run higher with resistance seen into 101 – happy to hold a positive bias until price closes (daily) below the 5-day EMA.
- Thursday – CPI (08:45 AEST) – the consensus is we see NZ CPI at 1.5% QoQ, and 6.9% YoY (7.2%). A big number should solidify calls for a 25bp hike at the May RBNZ meeting, where we see 18bp of hikes currently priced. EURNZD has been a well-traded momentum play and is looking strong, so a weak CPI print would benefit those long this cross. AUDNZD also looks interesting as price is breaking through the series of highs seen throughout March at 1.0800 – a grind but upside potential for 1.0950.
Central Bank line-up
Fed – Bowman (19/4 at 03:00 AEST), Goolsbee (20/4 at 07:30), Williams (20/4 at 09;00), Waller (21/4), Mester (21/4), Bowman (21/4), Bostic (21/4 at 07:00 AEST), Harker (21/4 09:45 AEST), Cook (22/4 09:35)
BoE – Cuncliffe (17/4 23:00), Mann (20/4 02:30), Tenreyro (21/4 01:30)
ECB speakers – 14 ECB speeches – see the line-up here https://twitter.com/ChrisWeston_PS/status/1647491798187778053?s=20
Marquee US corporate earnings
Charles Schwab – Monday (before market) – implied move on the day of earnings (derived from options pricing) – 8.7%
Bank of America – Tuesday (before market) - implied move – 6.5%
Goldman Sachs – Tuesday (before market) – 3.4%
Netflix – Tuesday (after market) – implied move 8.1%
Tesla – Wed (after market) – implied move 6.5%
IBM - Wed (after market) – implied move 4.1%
AMEX – Thursday (before market) – implied move 3.7%
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