- Jackson Hole event may or may not provide clearer guidance
- Traders may consider short-dated EURUSD puts or other USD calls
- Brexit deters investment so latest GBP uptick may be opportunity to sell
- Oz economy is running on easy credit fumes so AUDUSD dive possible
- BoJ meeting on Sept 21 will inevitably trigger a JPY move
Hard to believe that the whole world will be watching sleepy Jackson Hole next week. Pic: iStock
By John J Hardy
This week’s action in the currency markets lacked conviction, with choppiness and false breaks suggesting a thin, summer market awaiting catalysts. The US dollar has mostly been on the defensive this week, having broken a key local level versus the euro ahead of 1.1250 while USDJPY has seen the key 100 area in play. Elsewhere, the dollar has managed to avoid new lows, but clearly the last shreds of support are in view and traders are looking for a catalyst to do something with the greenback after a week of confusing signals from the Fed.
Next week, as we discuss below, we have a potential catalyst in the form of the Fed’s Jackson Hole economic policy symposium, with Fed chair Janet Yellen scheduled to speak next Friday. This event could prove a damp squib or could be a significant long term policy signal – so traders will need to respect the potential here.
Optionality around Fed’s Jackson Hole symposium
The Kansas City Fed’s Jackson Hole symposium has often served as a platform for major new policy hints from the Fed in the past, and anticipation has been heightened this time around by an essay published by the San Francisco Fed’s John Williams’ (who worked with Yellen when she was the president of the SF Fed) that described new policy directions.
There is also certainly the possibility that the conference proves a bit of a damp squib or merely hints at the Fed’s long-term thinking, at which the market shrugs its shoulders amid the lack of any shorter-term implications, especially as new more radical policy options like NGDP (nominal gross domestic product) might require more coordination with the fiscal authority and therefore considerable time. Regardless, traders may want to own USD optionality around this event in case it triggers USD flows, particularly given that the USD is poised at important technical levels.
Trading stance: In volatility terms, there may be most to wring out of USD upside and traders may consider short dated (2-week) EURUSD puts or other USD calls – perhaps in USDCAD given that the oil rally may not prove sustainable.
Sterling got a solid bump this week against the US dollar on the strong UK retail sales, which suggest a reasonable level of consumer confidence in the wake of the Brexit vote. But the longer-term uncertainty hanging over the UK after the Brexit vote will still mean foreign capital will remain wary of investing in the UK, which requires constant large inflows to offset its very large current account deficit. This latest GBP uptick may be seen, therefore as an opportunity to sell at a good level.
Trading stance: Traders will look to short GBPUSD as long as it stays/closes below the 1.3200 area and if the pair trades back below 1.3000. Alternatively, EURGBP may continue higher as long as the 0.8600/25 area remains intact on a daily closing basis.
AUDUSD downside/AUDUSD upside
AUDUSD is showing clear signs of struggling in the 0.7700/50 area and was having a look again at the technically critical 0.7600 area late Friday. A break of that level next week looks like a trigger for a further plunge into the heart of the long standing range as traders sour on the AUD outlook after considering the outlook for Australia’s economy that is running on easy credit fumes. On the other hand, a renewal of the surge in commodities and a close clear of 0.7700 again after this latest dip could point to new highs for the cycle as the market is convinced that the global liquidity provision from central banks demands a reach for every last bit of yield available.
Trading stance: Traders may look to short if the Friday or Monday close is near or below 0.7600 and for the action to take the pair into the 0.7400 area over the next week or two. A close above 0.7700, on the other hand, could encourage bulls to get involved again on dips for a challenge of the April highs above 0.7800.
USDJPY options for post-BoJ/FOMC
Not only do we have the Fed’s Jackson Hole conference on the way, but also a potentially very important Bank of Japan meeting on September 21 – all with the USDJPY diving back and forth around the 100 level. While Jackson Hole may or may not move the USD, the Bank of Japan meeting will inevitably trigger a JPY move due to the uncertainty around this meeting – meaning the BoJ has higher potential to either surprise with a new policy direction (possibly JPY negative) or disappoint by doing very little (JPY positive as the existing measures are seen as ineffectual in the first place and expanding them is seen as unlikely to help).
Trading stance: This week, we bought a 102.50 call option for expiry on September 23 for about 85 pips (spot was trading around 100.30 at the time). Given the potential for a sharp move in either direction, traders might consider a “long strangle” over the event if unsure of which direction USDJPY will go, long both a put and call, though this is more expensive in option premium terms and requires a larger move for the overall structure to pay off.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank