Now that the political posturing and gesturing and G20 promises have been completed, Capital markets again can trade with that lack of conviction and air of uncertainty. Already this month, one month implied volatility for the EUR market has fallen to “extreme lows relative to one year implied volatilityâ€, suggesting that the markets trades complacent, particularly in the event of extreme event risk. Historically, at such levels the traded currency usually wants to burst outside of its range. Are we about to do that and finally get to see volatility? One gets the feeling that the squeeze is on!
Last week very little seemed to be working for the EUR bear. Many of the weaker shorts were taken out once the market breached that psychological, and at the time, option defended 1.32 level. Already this week’s has started with a flurry of activity, very much backed by heightened market negativity that is providing a testing time for risk and commodity held currencies. A flurry of negative PMI’s and a widening of Euro-zone spreads to bunds are again fueling a rush to get short the ‘single currency.’ However, the big picture is little changed, only some of the details. Both fixed-income and FX levels continue to trade a familiar range. Overall, the market remains broadly short EUR’s and requires data, like today’s PMI, to maintain their conviction.
Thus far for April, the EUR market has traded 1.30-1.3250 approximately, and within that range, current levels should remain neutral. Market advice would be to “ignore the noise and play the range,†however, the new overnight spec players believe that recent events are about to open up the spot ranges. For trader and market sanity let’s hope so. Increased uncertainty in Europe’s political landscape is setting this morning’s tone. In the French election, Hollande remains ahead of Sarkozy. The market fear is that if Hollande is elected, he will call for the renegotiation of the European treaty on fiscal discipline. Optics tells us that France to date has been a major player in devising a solution to the Euro debt crisis, so any signs of instability and we have the makings of an event risk excuse. In the Netherlands, with the budget talks collapsing should put the country’s triple A credit rate at risk. This is another Euro negative.
Global and EUR specific negativity does not stop there. Overnight, Chinese, French, German and Euro-zone data is again fueling market negativity. French business activity remains at six-month lows, while the German private sector expanded at a slower pace this month. In Europe, not unlike the Germans, the private sector has declined at its fastest pace in six-months this month. Offering no support for risk was Chinese preliminary Manufacturing PMI remaining in contractionary territory for a sixth straight month.
Already this morning, the market has seen the “longs†being stopped out once last Thursday’s high print (1.3166) was taken out on the way down. This has exposed the first line of defense around 1.3140 ahead of the figure on the downside. Technically, this market on an hourly basis is oversold, however, do not be surprised to see North America roll over and again sell any corrective upticks. This has been the winning formula for the month, but, in a contained range. This time, it feels different with a bit of momentum.
The highlight of this week will be the FOMC meet. There will be no rate change; however, policy makers will update their set of projections on GDP, inflation and employment. The projections are expected to be more interesting, as a number of FOMC officials belonging to the hawkish minority have likely moved forward their call for the first Fed rate hike. G10 rate stance is a changing, no longer can we rely on the easing policy or rhetoric for market positioning.
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Fed not Associated with Divergence
