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Trading with personality. Editor in chief of the weekly trading letter #TFCW: macro event driven and aims at alpha generation through an opportunistic style
  • Gearing FX Vols 0 comments
    Jul 27, 2014 3:35 PM

    The Future Club Weekly no.100

    Editorial by L. Metry

    #betterlatethannever @_TFCW: Follow TFCW now on Twitter offering you in-depth and constant market commentary with daily to weekly trading ideas combined with a humoristic tune - enjoy!

    Snap shot:

    • FX implied volatility expected to increase after summer blues ends
    • Volatility driven by monetary policy divergence: BoE/FED vs ECB/BoJ
    • Fostering technicals and fundamentals for a USD long trade
    • USDJPY most favoured pair to play the longer-term bounce

    This week's focus:

    Besides all the geopolitical news and the earning season, which remains on good track to convince investors to achieve alpha through a selective stance, recent chatter has also been focused on FX volatility. Several major banks' research departments released notes on how the estimate FX volatility will develop in the second half of the year. And as stated in TFCW's previous issue, the revival of volatility would certainly not hurt from a trader's point of view.

    Major broker houses such as Credit Suisse and Morgan Stanely released key notes, stating they are anticipating a moderate rise in implied volatility. This certainly is not the epiphany of the decade, as global monetary policy is currently standing on a cross-road. Both the FED and the BoE have made it clear to be standing near the end of a highly dovish cycle, while the BoJ and the ECB even more seem to stand ready in order to launch renewed quantitative easing measure. From a rate perspective this shifts the EUR-rates market into a "captain"-like leading role. Furthermore, "recent" spikes in previous years have been well correlated with fostering policy divergence. Much will depend on the world's largest economy's central bank, the FED, too. Nonetheless, it remains unclear if a widely anticipated rate hike, primarily from the BoE and later followed by the FED somewhere around H1 2015, creates enough of a shock environment to see larger moves in implied vols. So this hints to a somewhat more cautious stance towards long implied volatility bets, even though FX volatility across the board remains at new historic lows. Similar to equities currency pair selection is key.

    A main driver for volatility is the development of the USD and its hunt for bidding trades. Considering latest price action it looks as if the 2014 H1's "slump" long USD trade finally gains traction across the board. From a technical perspective the Greenback is currently challenging several key resistance zones of various currency pairs. In EURUSD for instance price action has just completed a larger bear wedge in combination with a smaller "head and shoulder" formation, which has led to a deep decline in recent sessions. At the same time this embodies a door opener towards the key target in the mid-1.32s. More bearish chartists even see larger declines towards the mid-1.27s as possible. But also USDCHF trades close to key resistances at 0.9138, while USDJPY has now consistently held above 101 levels. At the same time EM currencies have held their ground surprisingly well.

    Yet, this remains not a question for how much longer, but rather when they will break. USD 10yr yields have held steady within the 2.45-2.60 percentage range over the last couple of months. And the USD was still able to add to its ticker! The basis scenario remains clearly placed on rising rates, as they have found trough in latest months. Credit Suisse for instance estimates 10yr Treasury yields to close in on the 3 per cent level by year end, which would allow more massive USD tailwinds. In this case EM currencies would also fall victim to a fostering Greenback and initiate to ease off for an understandingly prolonged period. The underlying increase in rates spread would also lead to a bigger push in USDJPY, not even considering the BoJ launching any further QE measures. Renewed easing form that side is estimated to see USDJPY charging decisively higher, making USDJPY one of the hot picks for the fostering global policy divergence.

    So all-in-all it is evident that FX vol will eventually spike, but it remains difficult to get the timing spot on. Still, selective positioning allows for a good return basis, as the USD's technicals are increasingly encouraging. Furthermore, the possibly most affected currency pair by the spreading global policy divergence is USDJPY, while EM currencies are heavily vulnerable to any rise in 10yr Treasury yields.

    Chart of the Week (Correlation between USDJPY/10yr UST Yield (MV PRO))

    (click to enlarge)

    Next week's agenda:



    Monday 28 July

    ITA Business Confidence (Jul)

    US Markit PMI Services/Composite (Jul)

    US Pending Home Sales (Jun)

    Tuesday 29 July

    JPN Jobless Rate (Jun)

    JPN Overall Household Spending (Jun)

    JPN Retail Sales (Jun)

    SPA Retail Sales (Jun)

    UK Net Consumer Confidence (Jun)

    US S6P Case Shiller Home Prices MoM (May)

    US Consumer Confidence Index (Jul)

    Wednesday 30 July

    JPN Industrial Production (Jun)

    SWI KoF Leading Indicator

    SPA GDP (Q2)


    Eurozone Indust/Cons/Serv Confidence (Jul)

    USD ADP Employment Change (Jul)
    US GDP (Q2)

    US FOMC Rate Decision

    Thursday 31 July

    UK GfK Consumer Confidence (Jul)

    FRA Consumer Spending (Jun)

    GER/ITA/Eurozone Unemployment Rate (Jul)

    ITA/Eurozone CPI

    US Initial Jobless Claims (Jul 26)

    US Chicago PMI (Jul)

    Friday 1 August

    Eurozone Final Manufacturing PMI (Jul)

    UK Markit PMI Manufacturing (Jul)

    US Nonfarm/Private Payrolls (Jul)

    US Unemployment Rate (Jul)

    US Personal Spending/Income (Jun)

    Money part:

    It has been quite brave to launch a long EuroStoxx50 trade in the previous issue, but throughout the week the trade definitely paid off! Both the initial (3'195) and the intermediate (3'210) target were reached, even though Monday's entry point was all different but favourable. In an attempt to let profits run towards the final 3'235 target, Friday's bearish tone caught the best of the trade. Nonetheless, with the entry point at 1.28 the position is still up by roughly 4 per cent and TFCW continues to stick to call despite price action headwinds most probably remaining in the near-term. However, with a stop loss intact below the recent double, if not triple (???), bottom the risk-reward pattern is still appealing - this also from a macro perspective. Although last week's French PMI came in quite weaker, especially Germany and with it the overall Eurozone remain on track to deliver.

    For the time being, TFCW leans more closely towards the screen's FX table in order to closely follow the developments in USD. Time seems not yet fit to launch a new long trade in either USDCHF or USDJPY. But keeping a closer eye on the pairs does not hurt - just to get the hang of the situation and build up a gut-feeling. Especially as next week's data centres on US Q2 GDP, NFPs and the FOMC rate decision.

    Bottom line is that markets are still driven extremely by the central bank put. Nonetheless, as towards the end of this year monetary policy divergences are slowly but steadily starting to foster with the BoE expected to make the first tightening step, the interest rate environment is "flooring" out. Therefore Q2 and Q3 growth will still be boosted by easy money, but the focus will much more lie on how the global economy will cope with the monetary policy development going forward into 2015. Thus, once again it comes down to growth numbers - expecting anything else?

    Open Trading Ideas:

    Eurostoxx50: Long at current levels targeting 3'195/210/235 with a stop loss at 3'123 Ticker: MSXAS, Valor 24448910, Stop Loss at 3'050.08, Price at 1.27/1.28 (+4%)

    Recently Closed:

    Gold: Long at current levels targeting 1'330/1, 1'343 and 1'350 with a stop loss at 1'298N (new at 1'309) Ticker: CXAUN, Valor 23156767, Stop Loss at 1'238.5 Price at 0.71/0.72 (-15%)

    SMI: Short at current levels targeting 8'546 with a stop loss at 8'780 (new at 8'681) Ticker: MSMBU, Valor 23859988, Stop Loss at 9'038 Price at 0.91/0.92 (-10%)

    USDCHF: long at current levels targeting 0.8850/0.89/0.9040 and eventually 0.9250, stop at 0.8675 Product: Ticker: MUSAR, Valor 20097947, Stop Loss 0.8350, Price at 0.53/0.54 (+11%)

    SMI: Long at current levels targeting 8'545/8'610 with a stop loss at 8'365 Ticker: MSMBB, Valor 23860787, Stop Loss at 8'189, Price at 0.83/0.84 (+30%)

    SMI: Long at current levels targeting 8'459/500 with a stop loss at 8'264 Ticker: MSMBH, Valor 23859231, Stop Loss at 8'051, Price at 0.87/0.88 (+8%)

    Dax: Short at current levels targeting 9'600/550/436 with a stop loss at 9'810 Ticker: MDACR, Valor 22805149, Stop Loss at 9'955, Price at 1.18/1.19 (+28%)

    Dax: Long through 9'099 targeting 9'213/299/420 with a stop loss at 8'970 Ticker: MDABO, Valor 21877664, Stop Loss at 8'638, Price at 1.32/1.33 (+14%)

    GBPUSD: long at current levels targeting 1.6822 and eventually 1.7043, stop at 1.6520 Product: Ticker: MGBPR, Valor 21877820, Stop Loss 1.5964, Price at 0.67/0.68 (-25%)

    Nikkei 225: Long at current levels targeting 15'000/450 with a stop loss at 14'420 Ticker: MNKYG, Valor 21486382, Stop Loss at 13'278, Price at 1.41/1.42 (+9.5%)

    Please do not hesitate to give us feedback or ideas for possible topics!

    Have a great week!



    Warning!! Structured Products are complex products and are only to be traded by experienced investors. By investing in mini-futures (minis) you risk to lose the whole amount invested once reaching the given stop loss (remember you don't get free money, so no free leverage!). Furthermore the leverage works both ways: for and against you! More info on leverage, stop loss and price to the above mentioned minis are to be found under or

    Disclaimer: The above comments and trading ideas are mostly initiated through technical analysis and by one singular opinion only. The aim of this publication is only short term trading. The writer cannot be taken in account for any possible losses or false information.

    27/07/2014 Page 5 of 5

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