Good morning
We have seen a bit of consolidation in some currencies over the past 24 hours as we await the FOMC rate decision. The main mover is yen, which has pushed higher across the board, reversing some of its recent weakness. USDJPY is 135.80 having been 200 pips higher than that yesterday, GBPJPY is back below 170.00 and EURJPY back below 150.00. There is now a holiday in Japan for the rest of the week. GBPUSD is at 1.2505, exactly where it was this time yesterday, EURUSD at 1.1030 which leaves GBPEUR a little softer at 1.1335.
As feared, US regional banks came under renewed pressure, almost as though markets are trying to find the next victim now First Republic Bank has been rescued. Whether this has any bearing on the Fed rate announcement this evening remains to be seen. At the moment a 25bps rise is widely expected although likely to be accompanied by a more dovish statement, perhaps even a mention of a rate cut later in the year, however there are those thinking a rate rise would be a mistake, they look for a weaker US dollar as a result, for example CITI last night looked at a Friday expiry 135.00 USDJPY, which also takes in US nonfarm payrolls.
RBAs Lowe spoke following their 25bps rate rise. Made it clear rates were not on a preset course but some further tightening could be required and inflation is likely to remain high for a while yet. AUD has backed off a bit since, shrugging off some decent retail sales numbers, with GBPAUD at 1.8770 and AUDUSD 0.6665. Meanwhile NZ employment numbers were on the strong side which increased the risks of further tightening from RBNZ, NZD did push higher as a result. GBPNZD briefly dipped below 2.0000 overnight although has since recovered to 2.0080.
In other news, Arsenal kept their title hopes alive with a 3-1 win over Chelsea although Man City still hold the upper hand. I see a transgender athlete has won a women’s cycle race, taking home the $35,000 prize money in the process. I do try to remain reasonably uncontroversial on here but while I am happy for everyone to live their own life as they wish, I will not accept that a man who chooses to be a woman should be able to participate in women’s competitive sports. I’m sure there are plenty of arguments as to why they should be allowed but I don’t think I’ll be persuaded on this one.
I’m thinking we’ll have a reasonably quiet day ahead of us as we await the US rate meeting but don’t be complacent, there is plenty of opportunity for volatility to come this week. Does give me a chance to look at one of my favourite trades, selling an overnight option and buying the next day same strike. Higher overnight vols mean we end up paying very little premium for limited risks and decent upside. For example, sell the overnight 1.2500 GBPUSD put, buy Friday 1.2500 GBPUSD put. Costs about 15 usd pips (£1,200 per £1m notional). This is the maximum loss. If the first is exercised, you are longer GBPUSD at 1.2500, protected completely with the remaining 1.2500 put. If GBPUSD then bounces, happy days. Alternatively the first option is not exercised and you remain long a 1.2500 put for Friday. Works well due to the FOMC rate meeting and the nonfarm payrolls, offering decent chances of movement either way.
- 10.00 EU unemployment
- 14.45 US S&P services PMI
- 15.00 US services ISM
- 19.00 FOMC rate announcement
- 19.30 FOMC press conference
- 23.45 NZ building permits
- 02.30 AUS trade ba;ance
- 02.45 China caixin manufacturing PMI
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