Euro Dollar Rate Forecasts for 2014-2015 - page 27
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Options market points to more trouble in China and US
Late week rebound didn't slow put buying
Bloomberg writes about how options traders in China have built a large premium into bearish Chinese ETFs compared to bullish ones.
"Puts that pay out on a 10 percent drop in the China 50 ETF cost 7 points more on Friday than calls betting on a 10 percent gain, according to implied volatility data on one-month contracts. As recently as Aug. 24, the bullish contracts were more expensive. For the U.S.-listed Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the skew reached a record 38 points on Aug. 27 and closed the week at 28 points," Bloomberg reports.
Along the same lines, much is being made about the lack of any significant retracement in longer-term VIX contracts in the US. They measure implied volatility in S&P 500 options and are used for many derivatives, including the VXX and XIV (inverted) ETFs.
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EUR/USD: If Not A False Breakout, Where To Buy? - Credit Suisse
EUR/USD keeps hovering around the 50% retracement of the July/August rally at 1.1261, and the more importantly prior basing support at 1.1216/14, notes Credit Suisse.
"While resistance at 1.1397 caps, the immediate risk is seen staying lower, and a conclusive break below 1.1214 would warn the recent break higher and completion of a base was "false", to target the 61.8% retracement level at 1.1155 next, then the 21- and 55-day averages at 1.1125/07," CS argues.
A break of the latter, according to CS, would confirm such a false breakout setup and would target 1.1018/17 next.
"Resistance moves to 1.1308 initially, then 1.1364. Above the “neckline” to last week’s small top at 1.1397 is needed to turn attention back to the 1.1714 breakout high," CS adds.
In line with this view, CS runs a limit order to buy EUR/USD at 1.1108, with a stop at 1.1018 and a target at 1.1520.
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Here Is Why The EUR Still A Sell? - Credit Agricole
The EUR corrected higher for most of last week, mainly on the back of rising risk aversion. Although China-related uncertainty is likely to remain intact, investors’ focus should shift to this week’s ECB monetary policy announcement and press conference as a main currency driver.
Considering the past few weeks EUR appreciation, still weak commodity price developments and unchanged growth momentum downside risks to inflation should have risen.
Indeed, ECB Executive Board member Praet confirmed such prospects this week and he indicated one should not underestimate the central bank’s readiness to do more if needed.
Even if it appears too early to expect them to announce additional quantitative easing, central bank President Draghi should consider a more dovish rhetoric in order to prevent inflation expectations from falling further.
All of the above and less elevated speculative short positioning should make a case of the single currency coming under renewed pressure. This is especially true as the Fed should stay on track with considering higher rates this year.
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Buy CHF, NZD, EUR And Sell USD, NOK, JPY This Week - Danske FX Scorecard
BNP Paribas expects the ECB to refrain from easing on Thursday, even though the case for acting immediately is compelling in their economists’ view.
"Still, the ECB should signal that it is one step closer to providing more stimulus given the combination of tighter monetary conditions, falling inflation expectations and lower staff projections. These projections will not yet fully reflect the impact of the latest market developments, which is why we think the ECB is likely to wait for the next set of projections in December to extend its asset purchase program," BNPP projects.
"We think a longer QE would be important in extending expectations for zero nominal and negative real rates and driving longer-term eurozone portfolio outflows. ECB dovishness should also encourage renewed use of the EUR as a funder if risk sentiment continues to improve," BNPP adds.
BNPP remains short EUR via options going into Thursday’s policy announcement.
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EUR Getting Dizzy; Where To From Here? - BofA Merrill
The following is Bank of America Merrill Lynch's comprehensive outlook for the EUR (released today Aug 31) including the single currency's current major themes, strategies, forecasts, and risks.
Themes: monetary policy divergence will eventually weaken EUR/USD more. We have been arguing that normalization of monetary policies will be driving markets for years to come. We expect the Fed to lead the way. Other G10 central banks are likely to continue moving to the opposite direction for a while, and then start tightening after the Fed’s tightening cycle has advanced. Even if the Fed delays hiking rates, it will be the first central bank to do so, in our view. We believe that the ECB, at the other extreme, will have to ease policies further. We expect the ECB to miss its inflation target in the months ahead and start talking about QE2, in the form of extending QE after September next year. The timing of the Fed rate hike and the ECB seriously considering QE2 will determine the EUR/USD path, but the final outcome is a weaker EUR/USD, in our view.
Strategies:We like selling the EUR/USD rallies when we get them, as the path will continue being volatile. We also note that the Eurozone’s unemployment rate is the highest in G10 compared with pre-crisis levels, and that the Eurozone also has the largest output gap (see The USD has not peaked yet). This suggests that EUR/USD could weaken more and remain weak in the medium term.
Forecasts: still parity, but risks have increased. We are keeping our EUR/USD end-2015 projection at parity for now. However, upside risks to our projection have increased notably following the CNY devaluation. The market turmoil has triggered an unwinding of risk positions, which has benefited the Euro as it has become a funding currency. The market has also priced out a September Fed hike (still our call). We will reconsider after the latest market turmoil is behind us. We believe that the risks to our projection will affect only the timing, rather than the end point. Even if EUR/USD does not reach parity this year, we are confident that it will end 2015 well below the current level.
Risks: Fed, ECB, China. If the Fed does not hike this year and/or the ECB sends mixed messages following its new macro projections in the September meeting, EUR/USD could move again to 1.15 or even higher. Negative developments in China will continue supporting the EUR in the short term.
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USD Largely Sidelined; Staying Cautiously Bullish - BNPP
Swings in the global risk environment continue to drive FX price action, with a nearly 3% retreat in the S&P 500, a 9% slide in crude prices, and 2% decline in copper leading EM and commodity bloc currencies lower again, notes BNP Paribas.
"Against this backdrop, the USD itself remains largely side-lined, particularly with Boston Fed President Rosengren suggesting in his New York speech Tuesday that he remains among the FOMC members preferring to wait before beginning the rate hike cycle and the US ISM manufacturing sliding back to the middle of the G10 pack, BNPP adds.
"We remain cautiously and patiently bullish on the USD," BNPP advises.
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Euro Sellers To Re-Emerge After Position-Adjustment - BTMU
The euro surged in August as the turmoil in global equity markets escalated, and this strength in part reflected safe-haven characteristics with the euro-zone current account surplus of over 2.0% of GDP providing investors with reassurance of stability during the period of risk aversion, notes Bank of Tokyo-Mitsubishi (BTMU).
"However, the move was in our view more a reflection of positioning and the unwind of euro carry positions. The devaluation of the renminbi on 11th August may be encouraging the unwind of long CNY positions funded through the euro. Whether CNY positions or not, the IMM speculative positioning data indicated a large reduction in euro short positions in the week to 25th August, covering the period of extreme turmoil.
BTMU's EUR/USD short-term valuation model implies that the EUR/USD spot close in August is about where it should be and once positioning becomes less supportive, the euro will start to trend weaker again.
Firstly, "the euro-zone economy is more vulnerable to the financial market turmoil and hence we suspect that expectations of additional ECB action may increase. ECB Vice President Constancio stated on 25th August that the ECB will not hesitate to act again if price stability is threatened," BTMU argues.
Secondly, "reports that China may have spent USD 200bn defending the renminbi since the devaluation highlights the fact that global FX reserves are falling. While other EM countries are not spending nearly as much as China, the sharp depreciation in EM FX means declines in global FX reserves, which going forward may well result in these reserve holders selling the euro to maintain compositions," BTMU adds.
BTMU targets EUR/USD at 1.06 by year-end and at 1.00 by end of Q2-16.
FX Traders, Get Ready: 'Exit Doldrums, Enter Hurricane' - Barclays
"doldrums: 'A region of the globe found over the oceans near the equator, having weather characterized variously by calm air, light winds, or squalls and thunderstorms. Hurricanes originate in this region. – American Heritage. Dictionary of the English Language, Fifth Edition. (2011).'
For half a year, G10 FX, particularly the G4, have been stuck in the doldrums, trapped within ranges by a self-reinforcing combination of low liquidity and low investor conviction. A gust from China temporarily blew them out of the range, but it remains unclear if it is just to a new directionless range, or if, as we enter the North Atlantic hurricane season, the four winds are ready to howl in earnest as they did from June 2014 through March.
We see a persuasive case for the range trading in G10 currencies over the past six months to end. The exact timing remains uncertain; however, we see compelling value in calls on the USD and GBP versus puts on the EUR and commodity currencies, due both to low implied-volatility risk premia and the collapse in skews.
We review three potential themes that may facilitate the return of macro conviction and a break of recent ranges: a return to focus on economic divergence reinforced by policy actions; a world of “Global Missingflation”; and a more severe growth threat from China."
Marvin Barth, Lynnden Branigan, Nikolaos Sgouropoulos - Barclays Capital
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The hurricane means : "The time for relentless stop loss hunting have come"
EUR/USD rallies, as mixed jobs report provides little clarity on IR hike
EUR/USD rebounded from a major sell-off one session earlier amid declining Treasury yields, as a mixed U.S. jobs report provided little clarity as to whether the Federal Reserve could raise interest rates later this month.
The currency pair traded in a range between 1.1091 and 1.1188 before settling at 1.1151, up 0.0028 or 0.25% on Friday's session. For the week, the euro fell by approximately 0.5% against the dollar after suffering sharp declines in each of the previous two sessions. Despite fluctuating between 1.08 and 1.18 over the last four months, EUR/USD is virtually flat in comparison with its level in early-May.
EUR/USD likely gained support at 1.0959, the low from August 11 and was met with resistance at 1.1625, the high from Aug. 25.
On Friday morning the U.S. Department of Labor's Bureau of Labor Statistics (BLS) said nonfarm payrolls for the month of August increased by 173,000, below estimates of a 223,000 gain. The figure received a boost from a 56,000 gain in Health Care and social assistance jobs, including an increase of 16,000 in hospital positions. For the month, employment in financial activities rose by 19,000 and has expanded by 170,000 over the last year. Following upward revisions of 44,000 for June and July, monthly job gains have averaged 221,000 over the last three months.
Many economists regard the August jobs report as a tricky one to analyze due to the high percentage of Americans who are away on vacation throughout the month.
The unemployment rate in August fell 0.2% to 5.1%, its lowest level since April, 2008. The rate was expected to fall by 0.1% to 5.2% according to consensus estimates after remaining unchanged in July.
The U-6 unemployment rate, a broader gauge of the national employment situation, inched down 0.1% to 10.3% on the month. The reading measures the total level of unemployed workers plus those marginally attached to the labor force, as well as those who are no longer looking for a job but have looked for one over the last 12 months. In addition, 1.8 million were classified as being marginally attached to the labor force, down from 2.1 million 12 months earlier. Last August, the U-6 rate stood at 12.0%, after falling by 0.6% from the previous month.
By comparison, the U-6 rate peaked above 17% during the height of the financial crisis. It is also a preferred measure of Fed chair Janet Yellen, as she weighs whether the labor market has improved enough to warrant an imminent rate hike.
Currency traders continued to digest a dovish policy meeting from the European Central Bank's Governing Council on Thursday when ECB head Mario Draghi provided strong indications that the central bank will use all tools necessary to boost inflation throughout the zone. Draghi hinted the ECB could extend its €60 billion a month Quantitative Easing program in an effort to bolster long-term GDP and inflation. The ECB also left its benchmark interest rate unchanged at 0.5%.
Investors piled into U.S. Treasury bonds on Friday, following the release of the mixed jobs report. Yields on U.S. 10-Year Treasuries fell more than four basis points to 2.109%, its lowest level in more than a week, before closing at 2.131%.
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