The playbook for this week
The first thing to highlight is that USD/JPY is testing the 5-year downtrend and looking quite tasty from the long side, with price reflecting that of the S&P500.
Modest
moves can be seen lately in US fixed income, and once again I can't state enough how
bullish it is for equities (and sentiment more broadly, that we are seeing no
signs of worry and selling in US 'real' (or inflation-adjusted) yields. China
data continues to light up risk, and after yesterday's solid credit data, we've
seen industrial production a punchy 100bp better than the street was looking
for.
The dynamics are compelling. Low vol, better liquidity driven by central bank action, better data, yet no sell-off in real rates and as we can see in below chart the CRB raw industrial commodity index is having a solid move higher, indicating the better economics. It is doing wonders for carry, and traders buying into higher-yielding currencies.
I touched on low vol, where we can visualise implied vol through various indices, such as the VIX index or JP Morgan global FX volatility index, which incidentally hit a record low today, or we can look at the options market and implied volatility for any currency pair and for a specified time. By using 'straddle' or 'strange' pricing we can understand the degree and extent of expected movement in price.
In the video, I look at a number of well-traded currency pairs, as well as gold and US equities and assess, not just key measures of realised volatility, such as ATR or Bollinger Bands, but also implied volatility. This is key for me, as it a visual of what the market thinks will be the degree by which price will move, up or down, and the content of this in relation to its 12-month range. I find this incredibly useful to understand how the market interprets known event risk and can help us with our risk assessment and achieve correct position sizing.
I also look at rates pricing, risk reversals and futures positioning. Take a look, as I hope it can help you understand the backdrop by which you operate, what's working and what isn't and can help you get perspective for the week ahead.
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