Slim ranges
The theme we noted yesterday continued strong in markets with the weekend’s events failing to have a meaningful impact upon markets. Tight trading ranges prevailed within most markets with measures of volatility failing to breakout higher. Spreads on options remained tight at least within the FX space as implied volatility continued to fall. With the headlines emanating from Russia this weekend failing to drive a safehaven bid within the market, what factors will the market cling to this week to determine price action?
Despite a relatively light data calendar for the front-end of this week, the focus will almost certainly continue to be upon rates: inflation and its antidote interest alike. Given that the market does not appear too jittery given the tight trading ranges and low implied volatility that we are observing, there could be demand for high yielding currencies as part of the carry trade. Note the continued outperformance of carry trades such a long high yielding Latam FX versus currencies including NZD and the Yen, as well as the Euro and Franc to a lesser extent.
The lower the volatility in the market, the lower the value at risk calculations and higher the probability of investors and traders entering such trades. The low volatility environment we are witnessing despite geopolitical uncertainty may provide the sustenance required for such trends to endure for longer. With recession expectations building in the Eurozone following underwhelming PMI data last week, that carry trade is less likely to be funded by Euro sales for now. That is at least until spot prices and borrowing costs adjust to the Eurozone stagnation risk. With the ECB Symposium now underway, hawkish comments from the ECB could stave off any further Euro price adjustment in the short run.
Discussion and Analysis by Charles Porter
British Pound With GBP back to where it started the year pretty much, there are some stories starting to appear along the lines that while that may be the case, GBP is still up 18% from a year ago following the Truss/Kwarteng mini Budget fall out. That comparison while of course true is not a […]
GBP While the Bank of England’s decision to pause on raising rates by the narrowest of margins with voting 5-4, that resulted in GBP being sold sharply which reflects the market’s view that while inflation at 6.7% looked better than expected yesterday, the effect of higher oil prices and petrol and diesel at the pumps […]
Bank of England It is the big week in UK markets not because there is much doubt in the minds of economists that rates will go up once again on Thursday, but rather more because the “clever” money is predicting that this increase will be the last. What could go wrong? Assuming rates go up […]