Reviewing Market Carnage 2.0

Back in the middle of October last year, I wrote an article to summarize and explain the Market Carnage. It was never published on my blog, therefore I added it in the Appendix section. This morning, it seems that we experienced another ‘Black Monday’, triggered by some disappointing news coming from China. The PBoC surprised the market with no RRR cut (while a 50-100 bps cut was ‘expected’ by the participants), and then followed a market collapse with the Shanghai composite down as much as 9% at one point (the most since 1996). US Equities were down as well, trading below 1,900 as you can see it on the chart below, while USD/CHF (blue line) is down 5 figures in one week flirting with the 0.9300 level when I was writing the article.


(Source: FXCM)

I personally believe that you can learn a lot from a trading session like today, that tells you that the market can go anywhere. While the sell-side research was telling me that EURUSD has nowhere to go but down and that US 10Y rate will never go back below the 2% level and that it could be interesting to start buying oil at $40, last week’s session and today in particular prove you that you can have it all wrong. One thing that I am ‘happy’ to see is that the Swissie has really acted as a safe haven currency, something that I understood after the SNB removed the EURUSD floor on January 15th (and consider it as a historical event).

Volatility was considered so high that the NYSE invoked ruled 48 to avoid a panic selling at the US Opening. The rule, approved by the SEC on December 6 2007, says that market makers ‘will not have to disseminate price indications before the bell, making it easier and faster to open stocks’.

Insane moves were seen on the currency market, to begin with NZDJPY that totally collapsed from 81.50 to 72.50 earlier today (that’s a 11-percent move in a single day!). USDJPY registered a 6-figure move down to 116 (mid-January lows), and EURUSD went North breaking the 1.17 level and gaining 300 pips in hours with a huge lack of liquidity (See Chart 1).

Reaction is expected now from China in order to calm down investors, and hopefully bring the situation back to normal. I am sort of convinced that the situation will stabilize within the next couple of days, however those market flash crashes kinda worry me about the global macro situation in most of the countries. As I mentioned it in some of my previous articles, I am persuaded that the Fed is not comfortable with those types of trading sessions. Coming now to the September hike, it is much less obvious that US policymakers will start a tightening policy based on the market’s attitude on trading days like today.

The question now is: ‘What sort of tools has China got in its advantage to calm this ‘panic’ (and the BoJ and SNB) in the coming week?’ I am currently working on a article about China’s economic and financial situation and its relation to the commodity market that I will try to publish soon.

In my current FX positioning, I am long USDCHF at 0.93 and short EURUSD at 1.1665 as a believe we will see a calmer afternoon.

Chart 1 (EURUSD)


(Source: FXCM)


For the past few years that I have been trading, I believe Wednesday was by far the most volatile and swingy session of all. It first started very quietly in the UK morning session, and then it really went out of control before the US opened. I don’t even know where to begin…

Equities continue their correction: Eurostoxx 50 index is down more than 12% (French and German market are off 12.5% and 13.5% respectively), the Footsie and the S&P 500 both down by 9.5% since the highs reached on September 19th.

If we have a look at the chart below, we can see that the VIX, which measures the 30-day volatility implied by the ATM S&P500 options prices, surged and breached the 30 level and is now trading back to November 2011 levels, taking the equity (S&P) down with him. There is clearly more room for further correction, no buy-the-dip scenario this time unfortunately.

SPVIX(Source: Reuters)

One currency that continues to strengthen in reaction to the risk-off sentiment (a real one this time) is the Japanese Yen. After the nice August/September momentum, USDJPY, which reached its peak of 110.08 on October 1st, was sold to 105.21 in the early afternoon before recovering back to 106.00. Our favourite [carry trade] pair keeps tumbling and is now trading at a 7-month low slightly below the 93.00 level. As I usually say ‘it is all about the Yen’, you better watch carefully where the currency is going at the moment [more strength!] as it will give you an idea of the overall market.

Another big ‘surprise’ was of course the 10-year US yield (blue line) that tumbled below the 2% level down to 1.86% approximately (May 2013 levels), before ‘recovering’ to 2.1%. I always ask myself ‘where does the market like to see the 10-year yield?’ Obviously not too high, but below 2% clearly means that the market participants are not confident [at all]. On the other hand, Gold (yellow bars) continued its rally, up to 1,250 before edging lower to 1,240. The 10-minute-period chart below (USDJPY in red bars) shows you that asset classes moves clearly ‘together’ under a ‘stressed market’.

GOldYenYields(Source: Reuters)

End of POMO, what to expect from the next FOMC meeting (October 28th)?

While we are ‘kindly’ approaching the last days of QE with the Fed stepping out of the bonds market at the end of this month (October 28th, see chart in appendix), I think we may have a couple of dovish FOMC meetings concerning the central bank’s ST monetary policy. To me, it looks like the US policymakers have made a ‘mistake’ by expressing themselves on that point [rate hike] as they should have let the market swallow a period without QE. True, Fed officials are willing to start tightening. For instance, we heard San Fran Williams (one of the most dovish and apparently seen as a good ‘barometer of the views of Yellen’) saying that he would hope the Fed can tighten, mentioning 9 months to see the first hike. However, it looks to me that the higher rates world is just an illusion…

In order to avoid the ON/OFF calls that we have seen since the beginning of the year (RBNZ, BoE and now the Fed), there need to be a sort of global monetary policy coordination. Otherwise, we are going to see other sharp fluctuations and especially in the FX market (remember, nobody wants a high exchange rate, not even the US, aka the Fed).

On the top of that, oil is plunging; coincidence? WTI November 2014 futures contract is now down more than 20pts since June trading slightly above 80 (as Zero Hedge mentions: ‘if Oil plunge continues, now may be a time to panic for US shale companies’). As I believe that Oil prices and the equity market are the Fed’s two most important components, I don’t only see cheap oil prices only as a benefit (stimulus) for consumers, therefore adding pressure on Yellen’s [and Co.] team.

My view goes for a Dollar pause, and I will carefully wait for the October (28th) FOMC meeting to see how US policymakers are going to deal with the current situation. An important figure to watch will be the Inflation report next Wednesday. US CPI is expected to remain steady at 1.7% YoY in September, however I think we could see some disappointment…

Unknown(Source: NY Fed)

FX ‘picking’, who is the one to watch?

For the past couple of months, volatility has declined in all asset classes and traders (and algos) have switched to a range trading attitude. If we have a quick overview of the market, we can see that the S&P500 is still fighting against the 2,100 level, the VIX is gradually approaching its crucial 12 level, core bond yields are trading a bit higher (Bund is up 10bps, trading at 16bps) and EURUSD is trading in the middle of its 1.05 – 1.10 range.

However, in a more detailed analysis, we heard some noise lately that trigger a bit of movements in the FX market.

1. SNB talks, first round…

The first one was the CHF move. A few days ago, I posted on my twitter account a chart (see tweet @LFXYvan on April 19) that I thought could be problematic for the Swiss economy (i.e. SNB). At that time, EURCHF was gradually approaching the 1.0250 level, down from 1.08 a couple of months ago (5% appreciation).

Then, a couple of days later, SNB comments sent he Swissy tumbling, with EURCHF and USDCHF up 150 and 200 pips respectively. In its comments, the SNB announced that it reduced the group of sight deposit account holders (bank account through which transfers in the form of cashless payments and cash deposits and withdrawals can be effected) that are exempt from negatives rates, therefore transferring the ‘negative carry’ to its clients and in hope that Sight Deposits are reduced.

Looking at the charts, it seems that it wasn’t enough to force investors to run away from the Swiss Franc and I think we are on the path to retest new lows on EURCHF and USDCHF. With Swissy becoming once again the safe-haven asset since the end of the floor in mid-January, SNB Jordan will have to do more to prevent the exchange rate from appreciating ‘too much’.

2. Cable: will the ‘hawkish’ minutes floor the currency losses ahead of the UK general election?

Yesterday’s BoE minutes trigger a bit of appetite for the pound and sent Cable to a 1-month high of 1.5070. As you can see it on the chart below, the currency is now flirting with its 50-day moving average, an important resistance that could halt the pair’s late bullish trend.


(source: FXCM)

To be honest, I didn’t understand the sort of positive GBP reaction based on the central bank’s report. If we look at the big lines, the Committee voted unanimously to keep the Official Bank Rate steady at 0.5% (as expected), and in the 23rd section, it says that policymakers were expecting the 12-month CPI rate to fall into the negative territory at ‘some point in the coming months’. It sounds more neutral (if not so, slightly dovish) than hawkish to me.

With the (uncertain) general election coming ahead, I’d rather keep a short position on Cable, especially at current levels. Conservatives should keep a tight stop at 1.5160 for a first target at 1.4750, however I would widen the room there and suggest a stop at 1.5250 (RR of 1.3).

3. Follow the CAD move

Another mover was the CAD, alongside rising prices for oil, which surged by 6 figures to hit a three-month low of 1.2090 on Friday before coming back to 1.22 (against the greenback). With the Western Canadian Select June futures trading at a 11.50 spread against the WTI and higher than expected inflation rate (1.2% YoY in March vs. 1% consensus), the probability of another 25bp cut from the BoC in order to counter a lower growth economic forecast was revised (lower) by the market. It could potentially cap USDCAD on the upside, first resistance is seen at 1.2280, then the second stands at 1.2400. I would be comfortable with a little short position on USDCAD, targeting 1.2180 at first (stop above 1.2360).


(Source: FXCM)

4. Trade the Yen from a ‘Technicals’ perspective

I will finish this article with the Yen and Japan latest news. We saw earlier this week that Japan Trade Balance saw a tiny JPY3.3bn surplus (vs 409bn deficit expected) after 48 months of trade deficits. Even though it should be considered as good news (for a country which is expected to see a current account deficit for the first time in 34 years), the reason of that tiny surplus was driven by a collapse in imports, that plunged by 14.5% YoY (the most since November 2009). The Good news for Abe (and Kuroda) is that the stock market closed above the 20,000 level this week for the first time in 15 years, making a least one of the arrows – monetary stimulus – work.
As the Yen still remains one of my favorite currencies to watch on a daily basis, I had a lot of conversations with some friends of mine, and we (almost) all agree each time that the BoJ will lose completely control of its currency in the medium/long term. If you look at Japan core figures (debt-to-GDP ratio of 240% according to the IMF, a declining population with more than 25% Japanese aged 65 or over – out of 127ml, massive stimulus as a share of the country’s GDP…), the problem is easily spotted and the biggest ‘opportunity’ will be in the currency market in the medium term.

However, I am more skeptical (i.e. less comfortable) with the short-term trading. Now that the currency has passed its safe-haven status to the Swissy (see tweet @LFXYvan on March 24), I am usually looking for some buy-on-dips opportunities. Being short USDJPY sometimes scares me in the way that I don’t understand how the market interpret good news or bad news in Japan (therefore I always keep a tight stop for short positions).

One thing I am still comfortable in saying that, in an intra-day basis, USDJPY and the equity market (SP500) are still ‘breathing’ together, therefore one of them will ‘carry’ the other.

The wide range on the pair would be 115.50 – 122, but based on today’s volatility I am looking at the 118.30 – 120.80 window. Any breakout of the window could lead to another ‘readjustment’; something I am going to watch closely. If the currency keeps approaching the high of the range, it could be worth going short at 120.60 with a stop above 121.00 and a target at 119.50.


(Source: FXCM)

A CB surprise…

After October 15th last year, yesterday was another insane day in the market. We know approximately the impact of a lower (or higher) NFP report on the US dollar or a lower (resp. higher) than expected EZ inflation rate on Euro bonds; however when the surprise comes from a central bank, we saw the consequences…
But first, I am going to have just one quick digression before going for it, concerning the OMT.

OMT is legal

Almost a year ago, the German Federal Constitutional Court (GFCC) found ECB’s OMT bond-buying program illegal and incompatible with EU and German law. Given that the GFCC only has jurisdiction on matters of German domestic law, it decided to leave judgement to the European Court of Justice (ECJ). In his Opinion on Wednesday, the Advocate General Cruz Villalon observed that the program is compatible with the EU Law and that the ‘objectives are in principle legitimate and on consonant with monetary policy’. He added that the program is ‘necessary as well as proportionate in the strict sense, since the ECB does not assume a risk that will necessarily make it vulnerable to insolvency’. As a reminder, the Advocate General’s Opinion is not binding on the Court of Justice. THe judges are now deliberating and the Opinion is expected to reach its judgment by May.

The Euro plummeted by 100 pips to 1.1730 (9-year low) after the news, but came back above 1.1840 on the back of poor US retail sales figures. As a reminder, retail sales dropped 0.9% MoM on Wednesday, the most since June 2012, and missed expectations of a 0.1% decline.

However, the ‘recovery’ didn’t last very long as the single currency is currently trading at 1.1630 against the greenback. How come?

Definitely unexpected…

Yesterday morning, slightly before lunch time (Swiss local time), the Swiss National Bank announced that it was discounting the minimum exchange rate of 1.20 per Euro (that it has been ‘defending’ for the past 3-1/2 years). It also announced that it would go further into NIRP policy, pushing its interest rate on deposit balances to even more negative from -0.25% to -0.75%.

By letting the exchange rate float ‘naturally’, the consequence were brutal and EURCHF, which had been flirting with the 1.20 over the past couple of months, crashed to (less than) 75 cents per Euro, wiping out every single long EURCHF position, before ‘recovering’ to parity (now trading at 1.0140).


USDCHF is now trading around 0.8700 (back from above parity levels, 1.02 to be precise), and EURUSD was sold to 1.1568 before rebounding.

A Stressed Market

The Swiss curve is now trading in the negative territory for all the maturities until 10 years; the swiss market index tumbled to (less than) 8000 (almost 15 drawdown) and then stabilized around 8,400.

US yields are still compressing, with the 5-year, 10-year and 30-year trading at 1.18%, 1.72% and 2.37% respectively. I added a table below that shows the 10-year overall and definitely summaries the current ‘environment’. As you can see, Greece is the only EZ country where yields are trading at astronomic levels on the fear of a Grexit scenario in 10 days (See article here). I like the expression ‘the Japanization of Global Bond yields’ used by some analysts I read.

Capture d’écran 2015-01-16 à 10.35.47


Our favorites, AUDJPY and USDJPY, both reacted to the SNB comments ‘bringing down’ the equity market with them. AUDJPY plunged from (almost) 97 to 95.30 and is now trading at 95.60. USDJPY broke below 116.60 and dropped to 116.28; before that, it reached a daily high of 117.92 during the ‘early’ Asian hours.

The S&P500 index followed the general move and broke the 2,000 level (closing at 1,992), and is now trying to find a new low. Is it going to be a buy-on-dips scenario once again? Clearly, the equity market is ‘swingy’, however I don’t think we are about to enter a bearish momentum yet and I still see some potential on the upside. Therefore, USDJPY should also help the equity market levitate and we should see the pair back to 120.

Discrete poor US fundamentals

Yesterday was also marked by a poor jobless claims report in the US, which was totally forgotten of course but surged to 316K (vs. expectations of 290K). In addition, the Philly Fed, an index measuring changes in business growth, crashed from a 21-year high of 40.2 in November to 6.3 in January (missing expectations of 18.7), the lowest since 2014. I know these figures are quite not relevant for traders and investors, however I do think it is worth noticing it. As a reminder, US inflation rate (watched carefully by US policymakers) decreased from 1.7% to 1.3% in November and is expected to remain at low levels (between 1 and 1.5 percent).

Overall, the global economy still looks weak, and we saw lately that the World Bank decreased this year’s growth projections to 3% in 2015 (down from 3.4% last June). Major BBs declined their forecasts on oil and expect prices to remain low in the first half of this year. We heard Goldman’s Jeff Currie lately saying that prices of crude oil may fall below the bank’s 6-month forecast of $39 a barrel. Remember the chart I like to watch (oil vs. inflation vs. yields vs. equities).

The next couple of event to watch are of course the ECB meeting on January 22nd, followed by the Greek national elections on January 25 (see below). For the ECB meeting, it is hard to believe that the central bank will do nothing after the SNB’s announcement.


(Source: MS Research)