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In the US the recent data has frustrated both the USD bulls and bears, and we see consolidation in the USD index - we’ll therefore need to see a series (and trend) of weaker growth data prints for the USD to take another leg lower – this puts tier 2 data releases, like the regional manufacturing prints, in the market’s sights as a possible volatility event risk, when it may not have been the case in a number of months ago.
US corporate earnings will get much greater focus given the marquee names reporting - and extent of the S&P500 and NAS100 market cap - hitting us with earnings outlooks this week. This will build on the 17% of the S&P500 who have already reported, where we see 75% have beaten consensus expectations on EPS and 54% on sales – sounds impressive, but it’s in line with the long-term average.
Looking at the technical set-up, consolidation is the name of the game in the US500 and NAS100, again, favouring mean reverting strategies. While EU equity markets and JPN225 are seeing a more bullish structure.
The play of last week in G10 was short NOKSEK (fell 2.3%), although this one doesn’t come up as frequently on client radars. This week, we see a neutral set-up in the USD, and this aligns well with client flow, with clients holding a net short bias in EURUSD and GBPUSD, but also in USDCHF and USDJPY, while skewed long in AUDUSD. I expect good attention toward the AUD, with Aussie Q1 CPI a potential landmine.
The RBA has said the May RBA meeting is ‘live’, so the Q1 CPI print could have meaning. We also see AUDJPY 1-week implied volatility above 30%, really the only FX pair where movement is being priced in G10 FX – this low vol is in-fitting with levels of volatility broadly at 12-month lows across asset classes. Like most traders I would like to see higher vols play out, but I am not sure this is the week it comes – so we adapt to the trading environment and that means deploying mean reverting strategies, tighter stops (given the reduced trading ranges) and potentially increased position sizing.
As always, we look for the risks and react and adapt to a major change in the trading environment.
Data that could move markets:
AUS
Wednesday – AUS Q1 CPI (11:30 AEST) – the market consensus is for headline inflation to come in at 6.9% (from 7.8%), or 1.3% QoQ. The trimmed mean reading is eyed at 6.7% YoY (6.9%). Rates markets price 8bp (or a 32% chance) of hikes for the May RBA meeting. A trimmed mean CPI print above 7.0% would see markets take the implied probability of a 25bp hike into and possibly above 50%, setting up for a very lively May RBA meeting. Conversely below 6.6% and we’d take this below 20%. Favour selling AUD rallies this week, with AUDUSD rallies likely capped into 0.6780/90.
Market pricing/expectations of RBA policy per meeting and the step up (in basis points) - how will this look after Q1 CPI?
China
Sunday
US
Wednesday
Thursday
Friday
Europe
Monday
Friday
Japan
Sweden
Corporate Earnings
Central banks speakers
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