Week ahead traders' playbook - 11 questions front of mind this week

It seems the script of having a protracted negotiation period is coming to fruition and the consensus view of the SPD/Green/FDP is looking more likely – the EUR has opened 7 pips higher, a rounding error and it could easily be faded in a few trades at this time.

There's a few events to move things along this week and a couple of risks to watch on the calendar spring out as China PMI (Thursday 11:00 AEST – consensus 50.2) and US ISM manufacturing (Sat 00:00 AEST – 59.5). Most of the focus though is towards central bank speeches from BoE Bailey (today 01:00 AEST), ECB’s Lagarde and then a raft of Fed speakers (see below) – Let’s see if they can spice things up, because while we saw volatility kick up early last week, with the VIX index hitting 28.79%, we see things more subdued again, with the VIX closing at 17.75%.

Here’s the weekly volatility matrix on key FX pairs and gold. I take the weekly implied (options) volatility (derived from Bloomberg) and divide by 15.9 to get the implied move through to Monday (expiry 4^th) and project this to spot to see the implied range. I like to see what’s expected by way of movement and if the market, given the known event risk, is seeing an elevated risk of higher chance of movement.

(Source: Pepperstone - Past performance is not indicative of future performance)

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What’s on the mind this morning?

• Continue to watch the Evergrande saga and whether holders of the property giant’s USD denominated debt are made right on their $86m interest payment on its March 2022 bond. Traders will be watching USDCNH and AUD, but the HK50 seems the clearest representation of sentiment in our tradeable universe – after a bounce to 24,799 the HK50 has been a sellers’ market, so we ask can the HK50 close below 23830, subsequently opening the door for the bear trend to continue?
• US Treasury yields moved higher last week, with the US 5-year bond moving from 86bp to 95bp, and UST 10s from 1.36% to 1.45% - A new range has been established, with the US 10-year Treasury breaking above 1.37% - the IEF or TLT ETF are both vehicles to play further upside in yields (lower in price). Is there scope for the 10-year Treasury to push to 1.50/1.60%, with the IEF ETF (10yr US Treasury ETF) headed to $114 on this development?
• Would a further rise in US treasury yields start to impact equity sentiment? This wasn’t the case last week and I suspect won’t be this week either but watch tech – there are few corners of the market more vulnerable to higher bond yields than tech and long duration assets – energy and financials are the best hedges to a rising yield environment.
• The correlation between US bonds yields and USDJPY has picked up – higher yields are good for USDJPY. USDJPY looks a little stretched, so I’d be wary to chase here, but I would be looking for a re-test of 110.50 as a potential support zone within what is a progressively bullish trend.
• Will there be any impact at all in the JPN225 or JPY from Wednesday’s LDP Presidential election in Japan? USDJPY 1-week implied volatility sits at 5.44% - which equates to an 84-pips move (up or down). Also consider the amount of Fed speakers due this week, which could impact bond pricing.
• Our flow in XAUUSD has been strong of late, with client positioning now skewed 65% long. The pain trade is a break of 1742/38 opens another move to 1700 – higher US bond yields and USD strength would be the obvious trigger here.
• GBPUSD pushed to 1.3750 in the wake of the surprisingly hawkish BoE meeting but retraced 90-pips, where we see support on the hourly chart at 1.3660. There is now a 13% chance of a November hike priced, with a 90% chance of a hike in March 2022 - a strong UK employment report on 12 October could change that and push pricing closer to 40% for a November hike. Near-term I prefer playing a range and would counter moves into 1.3766 to 1.3610.
• SpotCrude has been strong, as is SpotBrent which sits at a 3-year high and eyes a test of $80. $76.98 is the big level in US crude and a closing break here and talk of $100 will increase – volatility is falling in crude and the trend at this stage is bullish – can we see $76.98 broken this coming week?
• The Norges bank was the first G10 FX central bank to raise rates last week, and signalled they’ll raise again this year – the NOK was the best performing currency last week, with a gain of 1.5%. With the BoJ unlikely to hike for many years (if at all), long NOKJPY (up 2.2% last week) is the ultimate expression of policy divergence among major central banks, as well as a bullish view on oil. NOKJPY is the highest since 6 July – can it push firmly above 13?
• Can the US500 break near-term resistance at 4487 and make a play at the all-time high? A break below 4421 would suggest a more cautious stance. US Q3 earnings (JPM report 13 October) will start to get more attention in the period ahead.
• Some stability in Crypto over the week – the 100-day MA in Bitcoin and Ethereum seems to have held firm, as it has on several occasions. The level to lean against it seems.

(Source: Bloomberg - Past performance is not indicative of future performance)