A Huge Day of Event Risk for Traders

This suggests a tight open, in what is due to be an action-packed economic data day, amid our calls for a weaker open in HK and Japan.

The focus in the equity world remains on the set-up in S&P 500 futures, where we see the market stuck between the 50-day SMA (2945) and the 200-day SMA (2814), and this is confining the cash index into 2945 to 2822. A break of these levels should define the ensuing trend, not just the US markets, but could have a bearing on risk in FX markets, and commodities too, with the VIX index so influential on broad portfolio management.

Strong gold flow

Our biggest flow has been in gold, and there seems to a view that the yellow metal takes out the 1550 supply zone soon enough. Friday’s low of 1517 needs to hold otherwise we pullback sharply into trend support at 1502. At 00:00 aest tonight we get the US ISM manufacturing report, with the consensus calling for an unchanged read at 51.2. We watch for the sub-components, such as new orders and new export orders, but with this tier one data point correlated to bond yields, this is a clear event risk for traders.

With a 19% chance of a 50bp cut priced into the fed funds futures for the September FOMC meeting, and the speculative community running a record net long position of 2,127,352 contracts (see histogram below), if the manufacturing report comes in above say 51.5, with improvements the forward-looking components, then a number of the rates bulls will do a quick assessment.

That could keep the bullish momentum in the USD rolling on, where sentiment among institutional traders is already sky high and could cause a reasonable sell-off in front-end bonds, bear flattening the curve, with gold sellers in the mix. Of course, we could see a weaker ISM manufacturing print (than consensus) and the reverse kicks in, although the trend in the regional prints suggests upside risk to ISM print, with better numbers seen in Chicago, Dallas and NY, while Kansas was poor.

UK election risks are ever-rising

GBPUSD has been well traded too, with the pair breaking the bear flag pattern (on the daily) and the eyes fall on the 12 August low of 1.2015, where a break takes us to the 16 January 2017 low of 1.1986. It won’t surprise that implied vols have picked up in all the GBP crosses, with GBPUSD 1-month implied vol now at 11.78% and the highest levels since April. We look at GBPUSD 2-month options, and the skew of put volatility over call volatility. While most will look at the weekly Commitment of Traders report and see a near record 89,028 short GBP futures position, the skew in the demand for bearish downside structures vs bullish (calls) tells me a lot about semantics too, and right now the options market is paying up for downside, but its by no mean extremes.

Let’s see how that goes, but the wheels are in motion as parliament resumes in earnest today where a cross-party group are looking to pass legislation, which would require Johnson to extend A50 until 31 January. If this passes, and that is going to be hit and miss, as recall The Copper Bill, which facilitated the March Brexit extension only passed by a single vote, then Johnson has vowed to call a snap election for 14 October. There is no certainty he’ll even get the blessing here to hold an election, as he needs two-thirds of MPs to agree and that will require Labour to be on board.

Trading GBP is for the brave

Trading UK assets is for the brave, as we are fighting headlines and that is always a tough ask. The market is obviously discounting a lot already, and a decent element od no-deal Brexit risk even if it is impossible to model.

Eyes on the CNH and AUD

Staying in FX land, as we head through the session and, we continue watching USDCNH with the bull trend continuing and a break of 7.20 looking like a matter of time. The CNY fix has been a source of volatility suppression and inspiration for a couple of weeks now, with the PBoC lifting the USDCNY mid-point by far less than the streets models time-after-time, and risk assets have taken heart in that. As long as the PBoC don’t bring the ‘fix’ into the mix then vols don’t spike. We will also be focused on all thing Aussie today, and while we have kept a beady eye on moves in USDCNH, it’s the domestic side of the external/domestic debate that will see AUDUSD test key support into 67c or moves back into the middle of the 68-67c trading range it’s held since 1 August.

Overnight AUDUSD implied volatility sits at 12.6%, but that should move higher as the session grinds on, as this vol reading is only 47th percentile (over the past 12 months), so it’s not overly high. The market is pricing a 38-pip move (with a 68.2% degree of confidence) on the session and that accounts for a whole plethora of event risk. First up, net exports, which are expected to contribute 30bp to tomorrow’s Q2 GDP, and after yesterday’s inventory data, one wouldn’t be highly surprised if the consensus of 0.5% QoQ is now closer to 0.2% to 0.3%.

The implied move also accounts for July retail sales (also 11:30aest), with calls for a 20bp increase here. We also watch for the Q2 balance of payments print, where the consensus is we see a surplus of $1.5b, which it will not only be used as a political accolade but for those who model currencies long-term valuation, current accounts do matter.

The RBA meeting (14:30 aest) is the central focus though, even if the market places a 12% chance of a cut, and the bigger driver of the AUD will likely be the statement and whether it is dovish enough to meet the 54bp of cuts priced in over the coming six months, or 62bp of cuts over the coming 12 months.

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Chris Weston, Head of Research at Pepperstone.

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