John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 18 December 2017 at 15:55 GMT

House View: 2017 ending with record low short-dated options volatility

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2017 ending with record low short-dated options volatility for the time of year
  • Key question going into 2018 is what will rock the complacency boat and when. Trends may be very weak/nonexistent until this can be answered. 
  • US tax reform likely to be voted into law this week – not immediately improving the USD outlook though US short rates continue higher.
  • Next USD question: US long treasuries as the calendar year rolls to 2018 – long bond yields may surge as companies slow pension contributions due to new tax rates. 
  • China: dramatic policy steps, if any, may wait until after Chinese New Year celebration – February 16.
  • JPY: there is a Bank of Japan meeting this Thursday. Market sees zero surprise. We see rising risk of eventual shock from BoJ on shift in focus – but when?
  • Sweden's Riksbank this Wednesday highly anticipated. QE extension expected, big surprise if none or if guidance more firm than Riksbank normally delivers. 
  • ZAR: plenty of drama as ANC elects its new leadership and decides South Africa's future direction. Ramaphosa win could drive further ZAR strength. 

  • Tech levels on watch for developments:
  • EURSEK is jumpy around the pivotal 10.00 level post-Riksbank. Bears need hawkish Riksbank surprise and a push down through 9.8000.
  • AUDUSD has risen to test its 200-day moving average just shy of 0.7700 - this level up to 0.7750 looks pivotal. 
  • USDCAD shows a very weak CAD, given action elsewhere. Not far from big range top 1.2917 and then psychological 1.3000 level above. 

  • Trade themes 
  • Looking for bearish reversal setups in NZDUSD ahead of or around 0.7100
  • EURUSD has been impossible within constricted range – long above 1.1900-50, short below 1.1700.

Fixed Income market in the hands of central banks

  • Core bond yields stable as world central banks are optimistic regarding regional growth forecast.
  • Italian yields are second highest in Europe after Greece as the 10-yr Italian bond yields closed above Portuguese 10-yr bond yields on Friday for the first time since 2010. 
  • Catalonia is going to hold regional elections this Thursday, in case the pro-independence movement loses, the independence bid should be dusted for good.
  • Gilts to be volatile all week as Theresa May talks to cabinet regarding a trade deal and on Europe will unveil its point of view on Wednesday.
  • Fitch upgrades Portugal to investment grade. 

High Yield
  • The selloff in US HY corporates last month didn't change much in this space as the US HY corporate spread remains at its lowest since 2014 and close to multi-year lows. This implies junk bonds are the most expensive ever.
  • Astaldi may increase capital structure of EU200m. 
  • Fitch upgraded Fiat Chrysler to BB from BB-

Investment Grade
  • Total Volume in IG primary is expected to decelerate as we approach year-end. This week we will see Germany coming up with 2-yr bonds, Spain with 3/10/15-yr and the US with 3/10/30-yr. 

Emerging Markets  
  • South Africa’s ANC is voting today. In November South African 10-yr bond yield reached 9.4% now it’s quoting 9% we expect that in the case Ramaphosa wins, we expect the yield to trend lower while if Dlamini-Zuma, the ex-wife of President Jacob Zuma, we expect further volatility.
  • Venezuela is looking to restructure debt blaming on sanctions.

US tax reform is short-term catalyst for equities

  • Maintain bullish view on US equities on US tax reform vote with 2,682 as critical support level.
  • Shifted to neutral on EM equities as key levels were broken last week; 1100 level crucial support.
  • Short-term FTSE 100 is range bound at 7,056–7,560 with Brexit news driving price action.
  • Neutral on STOXX 50 with trading range established in range 3,522–3,600; breakout could be "ketchup like".
  • Short-term bullish on Hong Kong equities as 28,000 proved strong support level; macro is underpinning strength.
  • Shifting to bullish on Japanese equities as we expect 23,000 level to be broken creating massive breakout move.

  • Maintain neutral view on cyclicals on a three-month horizon; short-term bullish due to US tax reform.
  • Our top three most preferred industries: software, semiconductors, technology hardware.
  • Our top three least preferred industries: energy, telecommunication, media.
  • Remain negative on energy sector as recent gains in oil price was already discounted.

Themes / Trade ideas
  • US tax reform is bullish for US/global equities short-term but we do expect fatigue over next three months.
  • Economic activity levels remain elevated in Europe at the highest readings since April 2007.
  • Best macro numbers out of China in October since around February despite a slowdown in credit.
  • Fed NY Underlying Inflation Gauge still just below 3 % indicating inflationary pressures in the US.
  • Cross asset classes implied volatility is touching new lows.

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