- AUDUSD could see a bid on longer-term negative NFP sentiment
- Kiwi set for a downward move versus the Aussie
- EURUSD at a key inflexion point as traders mull US jobs data
- USDJPY trade heats up around landmark 100.00 level
A bumper headline number for the June NFP does not change the fact
that there are still some hurdles to overcome before the US economy can be
said to be back on a clear route to success. Photo: iStock
By John J Hardy
Tough to look for our four trading themes in FX next week as we are writing this in the heat of the moment after the US employment report and next week’s action is highly contingent on how the market decides to treat the USD implications of this relatively mixed bag of a print...
AUDUSD flexibility depending on action early next week
We’re not big fans of the Aussie for the longer run, but if the US dollar is unable to sustain a bid versus riskier currencies after the jobs report, the technicals argue for a resolution higher after AUDUSD has been unable to re-engage to the downside from the key 0.7500-plus pivot area and we could go on to test the 2016 highs again.
On the flip side, a powerful reversal of Friday’s rally attempt would provide a strong platform for bears to finally get involved with a better setup now that we are on the other side of key US data event risks and have tested to new local highs.
Trading stance: Bulls will look for a strong close on Friday at new highs for the week and a follow through to new highs early next week will encourage a bullish outlook for a test toward 0.7800-plus in the coming couple of weeks. Bears need a bearish reversal and action back down through 0.7500/0.7475 early next week to offer a trading hook/setup for testing the downside as long as we avoid new local highs.
Long-date AUDNZD calls
The NZD is getting painfully stronger and we are fast approaching key CPI releases which will have a strong bearing on both Reserve Bank of New Zealand and Reserve Bank of Australia policy (July 18 for Q2 NZ CPI and July 27 for Q2 AU CPI).
The former has far more to run to the downside in policy terms and the market could be complacent on the risks of a more aggressive RBNZ as the pressure of the recent kiwi strength is likely to point to a more forceful policy response as well as a bigger CPI miss, with the RBNZ perhaps combining more aggressive macro-prudential measures together with more aggressive rate cuts in coming months. The risks look asymmetric for NZD downside relative to the Aussie from here.
Trading stance: AUDNZD bulls will establish half of a position here for three- to six-month options with strikes at 1.0600 or higher, depending on the option tenor.
EURUSD flexibility, contingent on daily/weekly close
The US employment report was sufficiently strong to mildly boost Federal Reserve rate hike expectations, even if there was not much to get worked up about. This has triggered a considerable back-and-forth in EURUSD in the wake of the report release as we await the weekly closing level.
A strong EURUSD close for this week (above 1.1100) could begin to wear on increasingly stale EURUSD shorts put on in the wake of the Brexit vote that haven’t performed. On the other hand, a close below the 1.10 level could yet save the bears’ outlook and shift the focus on the next support areas.
Trading stance: EURUSD bulls will look for a daily close solidly above 1.1100 to set up longs for a move back into the 1.1200-1.1300 zone. Bears will look for a close below 1.1000 to encourage a follow-up selloff to the 1.0800 area.
USDJPY call structures
USDJPY actually moved to test the 100.00 level in the wake of the US jobs report, a possibly psychological hurdle for the market next week as everyone remains on intervention watch. USDJPY could follow through lower, but the the Bank of Japan/MoF may look to intervene on any fresh yen strength, making for a difficult trading environment which calls for owning optionality – if only from a good price.
Traders will want to own volatility for the other side of the late-July BoJ meeting, whether for the upside or downside.
Trading stance: It appears we have strong risks of a testing of the BoJ’s intervention levels next week and traders may look to establish long USDJPY call positions with strikes not too far out of the money for the other side of the BoJ’s July 29 meeting, which could bring new policy measures.
Traders will find vanilla call options remain relatively expensive, but the advantage of these is the ability to hedge in and out of the market in the event of intervention spike, hoping to do so multiple times in choppy market action. Traders may establish half a position above 100.00 in USDJPY and only establish a second position on a significant move below 100.00.
Bright lights, big figure: The 100.00 level in USDJPY is seeing a lot of trading activity as investors weigh the yen's safe-haven bid against the possibility of central bank actions. Photo: iStock
— Edited by Martin O'Rourke and Michael McKenna