From the Floor: Pent-up dollar poised to unleash
- Dollar on the march against all its major peers
- Dollar momentum looks to be on the back of short-covering — Van Petersen
- Nonfarm payrolls could spark much bigger move on dollar — Van Petersen
- Data now the key to determining USDJPY, AUDUSD Options calls — Hardy
- USDJPY move likely to be held at 104.50/105.0 until BoJ meeting — Hardy
- FX Options show big gap in one-month implied vols and realised vols — Larsen
- D-Day for Brazil's Rousseff as markets hope for guilty verdict — Boye
- CLICK HERE FOR A REPLAY OF TODAY'S MORNING CALL
By Martin O'Rourke
Arise, sir dollar!
We'd got used to tracking a dollar performance through the summer that could be best described as lackadaisical but the first signs of autumn (to be fair, we've seen them for some time in Scandinavia) have brought dollar back into the ring and clearly ready to pack a punch.
Dollar was on the rise against all its major peers Wednesday morning forcing USDJPY to 103.0 plus, capping GBPUSD below the 1.31 handle and sending EURUSD towards 1.11.
"This has been a lot of short covering, but once people really start to go long the dollar and assuming nonfarm payrolls is not an abysmal number, you are going to see a much much stronger bid going forward", says Saxo Bank's Asia macro strategist Kay Van-Petersen. "Macro guys and CTAs are starting to pick up dollar buying".
Saxo Bank head of forex strategy John J Hardy has two FX Options positions open predicated on a stronger dollar over the coming month. Both the AUDUSD and USDJPY views will be data dependent but another overnight boost for US confidence in August that helped mitigate a disappointing July number has kept the needle moving in the right direction.
"We want to hold on here to the big gains for the post-Bank of Japan September 21 meeting", says Hardy, on USDJPY. "If the data is strong, then the trade engages but if it isn't then we slide back into the central bank easing. I'm hoping of course it goes stronger but the risk there [September 21] is that it falls back and wipes out all of our gains".
As far as USDJPY spot is concerned, Hardy anticipates a cap at the 61.8% retracement level of 104.50 or at the top of an Ichimoku Cloud at 105.0 until the BoJ meeting is done. Spectacular NFP data nevertheless would disrupt that short-term scenario especially if it boosts the odds on a Federal Reserve rate interest move for September, adds Hardy.
USDJPY could be capped at the 104.50/105.0 area to September 21
Yen weakening has certainly been to the taste of Nikkei bulls meanwhile which has added nearly 2% on the day as the export-led index gets a welcome boost from the USDJPY interaction.
"This outperformance in Nikkei on what was a very mixed day for other Asian equities is absolutely a USDJPY grind up story", says Van Petersen.
The USDJPY/Nikkei correlation
"There is a big gap between what is being priced in and what is actually happening", says Larsen. "Take one-month EURUSD and the implied vols are at 8.25% and the realised vols are at 6.25%".
"Before we get too carried away on the dollar though, it is important to stress that much of the latest dollar move has been short-covering".
Impeached Brazil president Dilma Rousseff gets to finally hear the verdict today (allowing for the odd delay or two) and markets are hoping for a guilty verdict from the senate.
"Brazilian assets will go haywire if it isn't but it is widely expected that the senate will vote her guilty", says Michael Boye, from Copenhagen's fixed income desk. "Although this may to an extent be priced in, there should be a slightly positive reaction even if buy the rumour, sell the fact could also enter the equation".
Brazil bonds have enjoyed better times since Rousseff was impeached
Saxo Bank's head of equities strategy Peter Garnry is pointing to a possible contrarian bet in EMEA on both developed and emerging markets. The discount on forward P/E and attractive relative dividend yields marks the underperformance out in the segment as "staggering" , he says.
But, as Garnry will be following up with a piece on TradingFloor in the very near future, we'll delve no more into this one for now. Definitely one to watch out for!
Martin O’Rourke is managing editor at TradingFloor.com
Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.