Its been an extremely busy start to the year with volatility staying high across most asset classes. FX and the PMs have stepped up a gear. The US$ bull market has been truly impressive. As impressive as the euro’s bear market. The SNB’s decision has thrown risk management into total confusion as historic volatility in the chf went from near 0 off the scale. Another black swan day for some care of yet another central bank’s actions.
We are a day or so away from the ECB’s historic decision on OMT, sovereign bond buying care of expansion of the ECB’s balance sheet. These are macro events that are potentially technical trend wild cards. The only way to hedge these events are via options. Insiders do not necessarily know what will occur and therefore price cannot be relied on here and now to provide insider directional guidance as to where trends are heading. Hedging your books in preparation for the ECB news event as well the Greek elections is a very wise thing to do in my opinion. This is why Ive chosen to lead this technical update with this reminder for all Capital synthesis readers. Reports like the CS report below “strategizing” to clients to stay long short the euro and long euro stocks is all well and good but if the ECB disappoints the reversal could be a tidal wave. If you are short the euro and long euro stocks I would cover the reversal risks with out of the money options covering the worst case reversal event.
Here the CS report strat for the ECB decision:
And here CS on the Euro
For a company that lost potentially hundreds of millions on the SNB surprise move it seems no lessons have been digested to pass on to their client’s. #
As we can see from the latest CFTC report the long US$ position is at extremes or extremes. It is the most crowded trade in the market. This doesn’t mean it will end it simply means that risk management needs to be considered if you are involved in this position one way or another. Especially around such an important news event.
Here Scotia on the CFTC
Here a macro view by RBC
I realize many are waiting for the following technical reports so once again i’m going to update this release tomorrow with a V2 version and possibly v3 as the day progresses. I have a stack of reports to update with and some technical comments of my own.
Here with his usual technical weekly update Fitzpatrick from CB.
And here the swiss team’s first technical weekly update for 2015.
Here the CS team with their wkly tech chart update
And a quick update on the commodities sector here by Barcap
And with that please look out for updates through the day tomorrow. Its been an incredibility busy period trading and in book setup preparation for Friday but i will update tomorrow this release.
1st Update here (8.48 am GMT)
Here CS with a volatility report. Given the recent evidence (ie post the snb last week) I suggest they are a little conservative in this report.
Their comments on Greece interesting. Ie than in 2012 Greece was the major source of volatility whereas this time around the market appears to not be pricing in any threat to stability from Greece. (Whenever a market places near zero volatility risk on an event like this its generally worth taking notice). More than 20% of the Greek economy is tourism, inside the currency union. In the event of the return to the Drachma expect this share of economy to surge. This would shatter Spain’s recovery in one move. Spain (who in turn also has an anti austerity party ahead in the polls for the nov elections) would also be forced to reconsider her membership of the currency union. To explain, a -6% (a conservative number!) from tourism income would shave a clear 1% from her GDP and have a disproportionate impact on jobs. Tourism is the main source of income for Spain’s vast numbers of low skilled part workers. I suggest Greece’s potential exist from the EU is more about Spain’s exist than Greece’s.
A long way of saying the market is showing a misprice of risk on Greece. In my view!
And here ML with a strat update:
And here ML on US equities
And again here with their 1st recommendations for 2015:
Here (12.30 GMT update) CS with an FX trade strategy doc. A continuation of the theme of US$ strength but with a risk management perspective.
And here CS again making some excellent points re 1 month eurusd volatility is relatively low vs 2012 2013. Ie the options around the pair for trade or hedging are not expensive on a historical basis.
A few more FX reports, given tomorrow’s main event.
Here MS with their regular FX technical weekly. (From the end of last week but little has changed and their euro thoughts re the ecb timely).
Here nomura on the eurusd
And here a couple of daily fx reports with some useful levels.
Its also worth making the point that fx trading in the last few days has been choppy and price hard to read. Many investors and traders are working to a different rhythm for now. Squaring their books, hedging things off and calculating exposures to various scenarios. We will get back to trading price as soon as the news breaks. Worth also mentioning that Syriaz is well ahead now in the latest poll in Greece. Any short term relief tomorrow may prove short lived due to Greece although those negotiations will likely be prolonged and therefore harder to market time.
All the best guys.
Rich