FX market stays quiet, implied volatility surges
(by Arnaud Masset)
Financial markets have been relatively quiet since the beginning of the week as investors have nothing to get their teeth into. EUR/USD has been trading within the 1.0570-1.0607 range since Monday morning, while the Japanese Yen initiated its slow return towards the 110.12 support level (low from March 27th) amid rising demand for safe haven assets.
On the equity side, the situation is quite the same. After extending gains on Monday, most equity indices are blinking red on the screen today with the Nikkei off 0.27% and the Hang Seng down 0.77%. US futures were also edging lower with the S&P 500 sliding 0.10%.
Despite the outward tranquillity of the market, investors are seeking to buy insurance through the option market. The one-month at-the-money implied volatility on EUR/USD has spiked to 12.50%, the highest level since early December last year. Except this time, the market is seeking protection against a EUR debasement.
The one-month 25-delta risk reversal measure collapsed to -3.77%, compared to -0.16% a month ago, which demonstrates that the elevated demand for put contracts have sent the price through the roof. This increasing demand for protection against a fall of the EUR against the USD reflects the market’s concerns about the upcoming French election.
EUR/USD is currently testing a key support area. The bottom of its uptrend channel currently lies at around 1.0575, while the 61.8% Fibonacci on January-March rally stands at 1.0557. The single currency has held up so far but investors are becoming particularly worried ahead of April 23rd (the first round of the French election). We therefore would rather avoid long EUR positions ahead of this event.
US situation balanced
(by Peter Rosenstreich)
Yesterday, Fed Chair Janet Yellen defended the Fed's independence and provided clarity regarding its monetary policy stance.
At the University of Michigan, Yellen suggested that two bills in Congress to use rules-based monetary policy and to audit the Fed would hurt policy-making process.
She went on to indicate that the Fed was moving towards its objective to be closer to neutral. Yellen stated that the unemployment rate at 4.5% was below what Fed members considered the lowest sustainable rate and the productivity growth was weak but is expected to pick up.
Overall her view on monetary policy was on the slightly hawkish side, yet spillover into USD was limited. However, the warning that short-term rates would need to rise should directly affect USDJPY given the pair sensitivity to yield spreads.
We remain constructive on USDJPY and an expected downside will be limited to 110.00. Any retest of this low area should be a signal to reload long USDJPY positions.
Today’s February JOLT jobs report and March’s NFIB small business optimism index should provide additional fundamentals for support for the US economy. However, with President Trump floundering hopes of quick industrial stimulus and tax reform impulses continuing to get pushed back, it is making it harder for US bulls to predict excessive growth acceleration above current estimates of 1.8% annual GDP forecasts.