G10 FX Weekly
Group Economics Macro & Financial Markets Research
02 June 2016
Boiling below the surface Georgette Boele Co-ordinator FX & Precious Metals Strategy Tel: +31 20 629 7789 georgette.boele@nl.abnamro.com Roy Teo
GBP spot market is relatively calm… …while the FX options market is far from that Fate of US dollar hinges on US employment report JPY gains due to expectations of lower BoJ easing RBA and RBNZ to keep OCR unchanged next week
Senior FX Strategist Tel: +65 6597 8616
Divergence between sterling option and spot market
roy.teo@sg.abnamro.com
This week, the latest UK EU referendum poll showed that the ‘Leave’ camp had taken over the lead over the ‘Remain’ camp. This resulted in a weakening of sterling. A remarkable divergence has developed on between the FX options and the FX spot market. The FX spot market looks relatively calm while the FX options market is more in a state of panic.
Option market volatility in sterling Implied market volatility
35 30 25 20 15 10 5 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 1-month volatility GBP/USD
1-month volatility EUR/GBP
Source: Bloomberg
The demand to hedge against falls in sterling has risen sharply resulting in levels not seen since 2004 (the preference for puts over calls has risen to extreme levels) and the referendum is still more than three weeks away. Often such activity impacts the spot market as well. However, up to now there are little signs of this. The depth in the spot market could currently be large enough to absorb these option market related flows. Another reason could be that at this point in time market makers are not unwinding these positions. If so, they may do this at a later stage or after result of the referendum is known.
Insights.abnamro.nl/en
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G10 FX We eekly - Boiling below th he surface - 02 June 201 16
If the outcome o were tto be a Brexit (not ( our base case) c then a shharp sell-off in sterling s in the spo ot market will l ikely be the res sult.
Large e demand forr downside protection in GBP/USD G Negative = more demandd for puts compare ed to calls
1 0 -1 -2 -3 -4 -5 -6 -7 04 05 06 07 08 09 10 0 11 12 13 14 15 16 Source: Bloomberg
f on US employment report High focus Since the end of last week, the US dollar recovery y has come to a halt. Weakerr-thanexpectted Chicago PM MI and Consum mer confidence e outweighed thhe better-than--expected data. There T is a reali sation in financ cial markets that if US employyment report to omorrow comes s in weaker-tha an-expected the eir expectations towards the F Fed may be too optimistic. As a re esult, some of the rate hike expectations forr this year (esppecially for the near-term) could be b scaled backk and the US dollar could mov ve lower. On thhe other hand, a stronger report including highe er-than-expectted hourly-earn nings could triggger a sharp ris se in rate hike ex xpectations forr June and July y and a higher US dollar. Currrently, the odds for a rate hike in n June are 22% % and for July 53%. 5 So the foc cus on the US employment re eport will even be b higher than usual.
Yen gains g due to lo ower expecta ations of BoJ J easing The Ja apanese yen (JJPY) strengthened from abov ve 111 to 109 aagainst the US dollar due to marrket expectation ns that the Ban nk of Japan (Bo oJ) will not incrrease monetary stimulus anytim me soon. This w was after Japan n Prime Ministe er Abe said thaat the planned sales s tax hike in n April 2017 wil l be delayed by y two and a ha alf years to latee 2019. Mr. Abe e added that the government will p proceed with sttructural reform ms and fiscal sttimulus. Howev ver, more b case given n the low inflatiion outlook. On n top of this, monetary policy easi ng is still our base we had d already expe ected that Japa anese authoritie es would delayy the VAT hike, which is already included in o our base scenario.
RBA and a RBNZ to keep OCR un nchanged next week We ex xpect both the R Reserve Bank of Australia (RBA) and Reserrve Bank of Ne ew Zealand (RBNZ Z) to keep the O Official Cash Rate R (OCR) unc changed next w week. In Austra alia, the strong Q1 GDP print has reduced market m expecta ations that the R RBA will lower the OCR in the coming months. W We maintain our view that the e RBA is likely to resume their monetary easing g bias in Augusst this year due e to weak inflationary pressurees. The strong Q1 GDP print is s mainly attribu uted to large co ontribution from m net exports. S Since 2013, net exports have been b strong in tthe first quarter before fading g in the followinng quarter.
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G10 FX We eekly - Boiling below th he surface - 02 June 201 16
Separrately, the RBN NZ is also like ely to keep their powder dry next week giv ven strong gains in the terms o of trade and re esilient house prices. As finaancial markets s are pricing in abo out 25% proba ability of a 25bp rate cut nex xt week, the Neew Zealand dollar (NZD) may gain g some sup pport. However, we expect the RBNZ to reesume their ea asing bias gust. later th his year in Aug ABN AMRO majorr currency forecasts
EUR/UUSD USD/JPY EUR/JPPY GBP/UUSD EUR/G GBP USD/CCHF EUR/CCHF AUD/UUSD NZD/UUSD USD/CCAD EUR/SSEK EUR/NNOK EUR/DDKK
02-Jun 1 1.1207 1 109.06 1 122.22 1 1.4439 0 0.7762 0 0.9868 1 1.1059 0 0.7215 0 0.6798 1 1.3082 9 9.2992 9 9.3299 7 7.4382
Q2 20166 1.155 1055 1211 1.400 0.822 0.966 1.100 0.733 0.688 1.255 9.255 9.255 7.466
Q3 2016 1.15 110 127 1.42 0.81 0.96 1.10 0.72 0.68 1.22 9.25 9.00 7.46
Q4 2016 1.15 110 127 1.48 0.78 0.96 1.10 0.74 0.68 1.20 9.25 8.75 7.46
Q1 2017 1.15 110 127 1.50 0.77 0.97 1.11 0.75 0.69 1.18 9.25 8.50 7.46
Q2 2017 1.15 110 127 1.52 0.76 0.97 1.12 0.75 0.70 1.17 9.00 8.50 7.46
Q3 20017 1.15 108 124 1.54 0.75 0.98 1.13 0.75 0.71 1.16 9.00 8.25 7.46
Q4 2017 1.15 105 121 1.56 0.74 0.99 1.14 0.75 0.72 1.15 8.75 8.25 7.46
Source: ABN AMRO Grouup Economics
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