Markets provoke the Fed, Brent breaks away

How Would G20 summit, The US Core PCE Inflation Report and The Chinese Data Dump Effect The Markets?

The article was written on 28/06/19

There has been talk of a ‘tentative’ truce (source South China Morning Post), and while this is a market that is ready to react, the mentality remains one of wanting to see hard evidence to be truly convinced.

Keep in mind we also have US core PCE inflation tonight at 22:30 aest and a move below 1.5% in the Fed’s preferred inflation gauge will modestly increase the prospect of a 50bp cut in July. We also see the University of Michigan survey (due 00:00aest), where we can look at the 5-10 inflation expectations survey and see this currently trending lower and at all-time lows. Again, the Fed will give this survey the once over.

(Source:Bloomberg)

US inflationary metrics aside, we have China data dump due out on Sunday. It’s always worth keeping an eye on China manufacturing PMI, and adding to the G20 Summit, the data does increase the risk of gapping on the Monday open. Although we would have to see a print well below 49 (anything below 50 shows contraction) for traders to take down risk on the open. This would enviably mean selling of US500, copper, CNH (offshore Chinese yuan), AUD, NZD and small buying in bonds.

(Source:Bloomberg)

AUDUSD

The AUDUSD daily is testing the neckline of the May/June double bottom, and if we do see a positive feel in the G20 and China data, then it could well break this pivot at 0.7021. It could well be influenced by USDCNH, and should USDCNH fall, AUDUSD will rally (and vice versa).

We can see AUDUSD 10-day realised volatility has increased a touch of late, with the Bollinger bands turning out, although in absolute terms, both realised and implied volatility are still very subdued and traders are not expecting big moves. The US data is naturally a consideration, and recall, traders pay ‘carry’ (the funding differential) to be long AUDUSD; therefore, FX funds will always prefer to be short this pair if the case warrants it.

There are so many sentiment and positioning indicators we can look at, and one that the institutional spot FX traders look at closely are ‘risk reversals’. I am happy to explain these in more depth to clients, but effectively I have looked at the skew of AUDUSD 1-week call option volatility minus 1-week put option volatility. If traders are showing a greater relative demand for call options, which give us the right to buy (bullish), over puts, this skew will move higher. At this stage, it sits at negative 0.31, which shows a slight preference for downside structures. It is finely balanced though and in-line with the five-year average.

Options traders are not convinced either way.

AUDUSD aside, we have already seen a break of the double bottom neckline on NZDUSD. Again, the mentioned event risk will impact this cross too, but the set-up looks very constructive at this stage. The technical target here would be into 0.6900. One to watch.

In terms of US equities, I have focused this week on the NAS100 (NASDAQ 100). At this stage, the buyers are supporting at the 7600 horizontal support level, although, the bulls need to push the index above Tuesdays high to build any momentum. A break below the 7600 level elevates the risk this index tracks into the 6930-double bottom.

GBPAUD

GBPAUD is another pair on the radar (as is EURAUD), with price flirting with a key break below a couple of prior reversal points. While the pair could be considered somewhat oversold, a weekly close through 1.8090 would increase the prospect this pair trends lower, with the 5-day EMA defining the move.