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My personal belief is that we’ll get a cut to all three key interest rates, which will assist in keeping the overnight EONIA rate between zero and five basis points. It will also keep European two-year yields suppressed. This is partially priced in, given we’re seeing negative yields in Germany, Holland, Belgium, Finland, Austria and Cyprus. You can then look over at Switzerland, where you can lend to the Swiss National Bank for two years and have the joy of paying them 11 basis points!
I also feel the ECB will give a strong hint around buying packaged bank loans (asset-backed securities) in December, while leaving the door that little bit more open for a full-blown QE program. But I feel the risks of disappointment are certainly there due to the recent moves in the bond market.
I really want to buy EUR/USD (for a short-term bounce), but there is nothing substantially obvious in the price action that suggests a reversal is due. Betting against the USD is ill advised and, when you see the new orders sub-component on the US manufacturing ISM expanding with such gusto (the index printed 66.7 – the highest since 2004), it suggests there are upside risks to the consensus US Q3 GDP at 3%. There is a startling correlation between the new orders component and GDP – something we’ve seen for many years.
GBP/USD at the lowest level since February
With the USD in mind, GBP/USD continues to divide the market, although Asia-based traders have pushed the pair through the key 24 March swing low of $1.6456. The BoE could be the first major central bank to hike rates. However, if you look at interest rate futures a full rate hike is priced in through to March 2015.
It seems the Scottish independence referendum is really gathering momentum and, with the ‘yes’ camp gaining traction, traders will struggle to hold into sterling longs and look at hedging structures around a potential out-of-consensus outcome. You can see this first-hand as yesterday’s 22% jump in one month implied options volatility.
One play that traders are looking at is to buy a GBP/USD $1.6200 two-month put option for a premium of 75 points. While this position is naturally out-of-the-money if we do see a ‘yes’ vote (GBP/USD should drop 300 points or so), it’s a good way to protect a more diverse multi-asset allocation portfolio.
In Asia today, the focus has been on Australia’s Q2 GDP, while Japan’s cabinet reshuffle is also keeping the JPY from finding buyers – we should find out more shortly. In China, strong expansion in the HSBC services PMI (54.1) has caused a solid 1.0% move to the upside in the CSI 300. It’s great to see good news resulting in equity appreciation, rather than the market pricing out stimulus and subsequently falling. The A50 cash (the top 50 mainland companies with the futures settled in Singapore) can be traded by IG clients and has rallied 1.3% today, with the index ominously close to taking out the August 5 high of 7475.
Australia in depth
The Australia Q2 GDP print was just above consensus at 0.5% and, judging by the initial 20 point jump in the AUD/USD to $0.9306, it seems a few funds were positioned for print closer to 0.1%. However, traders were pretty quick to fade the move, and it will be interesting if the pair can go on to test the August double bottom of $0.9239. We knew new exports would subtract a fair amount from growth but, at an annualised rate of 3.1%, current growth gives the Australian economy a nice cushion as we head into a period where there are a number of strong headwinds for the economy.
RBA governor Glenn Stevens certainly pointed this out in his afternoon pre-prepared address, suggesting, ‘GDP for Q1 and Q2 together points to moderate growth’. Mr Stevens pointed out the housing market once again, recommending it would be unwise to further inflate house prices given the strength of late (a slight AUD positive). His view on the currency was fairly forthright, saying the market knew his view and he wouldn’t repeat it – perhaps this suggests he is getting more confident in the strong USD story.
Europe should open on a modestly flat note, with US futures up ever so modestly. UK banks look like they could see a period of underperformance as a result of the upcoming referendum, so it will be interesting to see if names like Lloyds and RBS bounce back today. Data watchers will once again turn their attention to the US, with New York manufacturing and vehicle sales, while back in the UK the Halifax house price index will be in focus.
The Bank of Canada meeting will be of interest to FX traders, especially as the swaps market is pricing in an element of tightening from the Bank of Canada over the next six months. Moves to $1.0900 remain potential buying opportunities in my opinion, and while the BoC could acknowledge the recent increase in inflation, there is a real prospect Stephen Poloz stays neutral-to-dovish – potentially pushing USD/CAD to the August highs of $1.0997.