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Daily Fix: Warming to GBPUSD and EURCHF longs

Chris Weston
Head of Research
9 Sept 2019
It’s been a fairly quiet night across markets, and we see a mixed open for Asian equities. With little data to drive through the coming 12 hours or so, it’s likely to be a day of position management and assessing further probabilities of key events later in the week, such as Thursday’s European Central Bank meeting.

There hasn’t been much news for Asian traders to need to discount. A huge spike in US consumer credit (to USD $23.29bn versus USD $16bn eyed) has perked the interest of some but hasn’t been overly influential on pricing. A step back in time and we saw a worrying EU Sentix investor confidence report amid an uninspiring, yet slightly-better-than-forecast UK GDP and industrial production. But it’s all Brexit here, and there hasn’t been any earth-moving developments other than Parliament voting to force the Tory government to publish its plans for a no-deal Brexit.

It hasn’t stopped the GBP from having an upbeat session, gaining against all G10 currencies bar the NOK (best performer in G10 FX), with GBPCHF gaining nearly 1% and printing a strong outside period on the daily chart.

While trading the GBP is for the brave, GBPCHF has the potential for 1.2344 (the 38.2 retracements of the May-to-August sell-off). I don’t mind what I see in GBPUSD, either (see below), with price firmly closing above the May downtrend and appears to be forming a base. While I’m loath to go anywhere near the pound, I like what I see in the price action as I do in the vol space, with GBPUSD one-month implied volatility falling from 12.69% last week to currently sit at 8.74% and the 33rd

percentile (12-month range). If GBPUSD kicks up through 1.2354 again, I’d be looking for longs, with a stop through 1.2234, which is in line with the implied weekly move on the week in options markets (priced by the at-the-money straddle).

Daily Fix: Warming to GBPUSD and EURCHF longs

By way of guides, the S&P 500 finished unchanged at 2978, tracking a 20-handle range of 2989 to 2969 on the session, although breadth wasn’t too bad, with 59% of stocks closing higher. Volumes were a touch over the 30-day average, while cyclicals nicely outperformed defensive sectors and the Russell 2000 rallied 1.3%. So I’ve closed my long-held short Russell 2000 / long S&P 500 idea, and will look to re-establish this pair’s trade in the coming days / weeks.

We saw high-yield credit narrow 1bp versus investment-grade (IG) credit, although there’s been so much corporate IG debt issuance of late that moves have been somewhat distorted. We’ve seen selling across the fixed-income curve, with the long end underperforming (UST tens closed +8bp at 1.64%). That’s interesting given some brave calls for a possible cyclical upturn in the US economy, that we find the “US twos vs tens” yield curve steepening 3.5bp, which has pushed financials to easily outperform (the S&P 500 financial sector closed +1.5%), while WTI crude gaining 2.7% has also contributed. All in all, the bulls will acknowledge they’ve won a small skirmish here, and the broad quality of the overnight journey from A to B has been of reasonable quality, although I’d have liked the VIX index to move lower from 15%, which it hasn’t.

As far as calls go, S&P 500 futures are 0.3% lower from 16:10 AEST (the official close of the ASX 200), and Aussie SPI futures are 12 points lower through the same period. So, a softer feel to the ASX 200 open is expected. Considering we also face a 4.3-point headwind, with six stocks going ex-dividend on open, the Hang Seng, CSI 300 and A50 cash indices should open on a flat note. But keep an eye on the A50 index as an upside break of 14,000 would be clearly bullish and attract some good old FOMO capital.

Looking forward to event risk, in Asia we get NAB business conditions/confidence (11:30 AEST), which, depending on the outcome, is probably good for 10 pips in AUDUSD in a market seeing the next cut from the Reserve Bank of Australia in November (priced at 72%). AUDUSD is grinding towards 69c and building on the weekly outside period we saw last week. If we’re going to break the figure and head towards the 70c level, it feels as though USDCNH will need to move below 7.1000. Elsewhere, we get UK employment data, US NFIB small business confidence, and Canadian housing starts. All are small fry relative to Brexit, ECB, FOMC meetings, and even a Trump tweet.

Another pair on the radar is EURCHF, which again has broken the near-term downtrend and broken out after a price consolidation.

Daily Fix: Warming to GBPUSD and EURCHF longs

The bulls, it seems, are taking some control, although this could be more EUR shorts looking to take some off the table. In the options world, EURCHF weekly implied vols are contained even with the ECB meeting due Thursday. Some better selling in German bunds is helping EUR appreciation. And EUR traders will be watching the tape this week in EU banks, although the German twos-versus-tens curve will be key. If the ECB really wants to get in front of the economic slowdown, they need a steeper curve. How they go about that is incredibly problematic. As to achieve this, the ECB would need aggressive easing of rates and less on the asset purchase front. A steeper curve means a higher EURCHF.

Daily Fix: Warming to GBPUSD and EURCHF longs

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