- Traders should tread very carefully in this environment
- Brexit risk looms over every time horizon from one week to one month
- EURUSD on the war path higher after the US jobs report
- USD selling avalanche could continue for a spell in coming week
The spectre of Brexit looms above every trade. Photo: iStock
By John J Hardy
After the US payrolls shocker on Friday, we divide this week’s trading themes up into two tactical ones for the coming week, and two more long-term ideas geared for developments over the coming month or more. Traders should tread very carefully in this environment as trading on all time horizons from one week to one month are heavily affected by the spectre of the June 23 UK referendum on EU membership.
(1) Long then short EURUSD: EURUSD is on the war path higher after the US jobs report as the market is suddenly pricing out the Fed rate hikes that Federal Open Market Committee members were trying to encourage the market to start pricing back in for the June or July FOMC meetings. This could lead to a further EURUSD squeeze over the next week, even if the upside may ease quickly fade as it has so many times previously, as we’ll need further evidence that the US is tilting into recession before we can begin to argue for a major break higher in EURUSD. As well, the looming UK referendum may keep the pair range-bound for now.
Trading stance: EURUSD traders may look to get long of EURUSD on dips, provided they stay north of 1.1225, looking for a follow-up rally to the 1.1375 zone and then may look to get contrarian to further EURUSD strength selling around 1.1400/25 for a try back to the 1.1300 area or lower as the looming UK referendum possibly keeps the pair range-bound eventually.
(2) Tactical AUDUSD upside: The avalanche of USD selling could continue for a spell next week, and those currencies that recently saw the most selling versus the greenback could rally the most on position squaring. Given the heavy AUD selling of late, this could leave the AUD vulnerable to considerable further upside toward 0.7500+ and the heart of the previous range in the coming week.
Trading stance: AUDUSD bulls will look to buy dips if Friday sees a strong close for a try above 0.7500 and possibly the 61.8% Fibo retracement at 0.7570 as the market prices back out the prospects for more Fed rate hikes.
(3) The No Brexit/or “Brescape” options strategy – long GBPJPY via options: Last week we discussed trading a Brexit scenario via GBPUSD put spreads. This week, we wonder whether a sterling rally might materialise against weaker currencies with or without a Brexit, particularly against the yen, which has seen an aggravated rally on perceived inability of the Bank of Japan to move the needle with further monetary policy moves. A GBPJPY rally over the 3-month time frame of this theme might require some or all of the following: resurgent UK data with or without a Brexit vote as confidence/pent-up demand returns, stronger risk appetite, a new JPY selloff as the BoJ and the Shinzo Abe government gear up for new easing measures. The longer time frame is a key component of this trading theme.
Trading stance: GBPJPY bulls may look for high reward/risk options strategies over a three-month time horizon for GBPJPY upside, for example, a three-month 165/170 call spread, which costs about 130 pips and offers maximum profit of approx. 370 pips if GBPJPY trades above 170 at expiration. (Spot reference 156.30 on Friday, June 3 for Sep 5 expiry.)
(4) Short NZDUSD via options: Last week we looked at shorting NZDUSD in spot, a trading theme that left the bears high and dry this week as kiwi squeezed higher amid a general disappointment with the lack of follow through lower and the stronger risk appetite early in the week supporting riskier currencies. This was topped off with a weak US jobs report on Friday that saw NZDUSD squeezing higher still. But we have a Reserve Bank of New Zealand meeting up next week that is likely to see the RBNZ cutting rates (at least, a split analyst community is largely in favour of a cut now rather than later).
Given the recent kiwi strength, the bank may look to avoid disappointing to the hawkish side after recently expressing hope that macro-prudential measures would help avoid lower interest rates feeding housing bubble risks. From here, if US data continues to worsen and recession worries mount, riskier currencies may come under more pressure than the USD anyway. And on the other hand, if the US data picks back up this month, the market will be happy to revisit USD long positions.
Trading stance: NZDUSD bears may look to buy 1-month to 2-month put structures, whether plain vanilla puts or put spreads. For example, a 1-month 0.6800 put or a 2-month 0.6750-0.6500 put spread.
— Edited by Clare MacCarthy