• GBP breakdown risks on painful wait for EU trade deal
    by John Hardy on February 6, 2020 at 11:30 am

    Sterling is at risk of a major near term setback during the post-Brexit transition period, because it remains unclear what shape the eventual trade deal between the EU and the UK will take. We look at the risk of further GBPUSD downside on a break lower. Medium Term / Sell Instrument: GBPUSD Price Target: 1.2710 Market Price: 1.2965 Background: Sterling has been on a "honeymoon" with investors since Boris Johnson won a strong mandate at the December election as it paved the way for a quick Brexit at the end of January. But now, the harsh reality is catching up with the market as we all realize that the hard nut for the EU and the UK to crack was not the terms of the Withdrawal Agreement, but the shape of the eventual trade deal after the transition period. Boris Johnson has taken a hard line in claiming that he will seek a free trade deal and will accomplish this by year end. Sterling could fall considerably as investments into the UK will prove slow as business owners wait for a trade deal before acting and on fears that the EU will do what it can to squeeze the London financial services complex. The Bank of England is behind the curve, meanwhile, in providing the struggling UK economy with support on its operating assumption that the bounce in confidence would be enough to pull the UK economy higher. BoE rate cuts are therefore likely in the pipeline this year. Technically, note the recent lows around 1.2940 and 1.2905 as possible triggers for a further consolidation toward the 200-day moving average - just above which we place the profit target for this Trade View.   Management And Risk Description: The risk here is that price action proves choppy and the market directionless as investors are unwilling to commit to a directional trade on GBP, or that negotiations take on a friendly tone far more quickly than we anticipate.  In other words, the chief risk is that the direction is wrong and/or that risk parameters for the trade are too tight (stop levels, etc.). Parameters: Entry: 1.2940-1.2975 Stop: 1.3040 Target: 1.2710 Time Horizon: One to two weeks   John Hardy Head of FX Strategy Saxo Bank Topics: Trade View Forex GBP GBPUSD Brexit

  • Pick up some extra yield over Chinese sovereigns
    by Althea Spinozzi on March 29, 2019 at 2:50 pm

    Fixed income investors looking to pick up some extra yield over Chinese government bonds without adding risk should consider the Export-Import Bank of China, one of three policy banks in China and an attractive alternative to CGBs and the China Development Bank. Strategic Trade / Buy Instrument: Export-Import Bank of China CNY bonds (CND10001PY09) Price Target: n/a Market Price: n/a Background: The Export- Import Bank of China (Chexim) is one of three policy banks in China. It implements policies to promote the export of Chinese products and services. The bank is the sole provider of Chinese government concessional loans, but it also performs other commercial activities such as providing credit for infrastructure projects andChinese businesses overseas in the industrial and energy fields. We prefer Chexim to the China Development Bank because its operations are more selective and focused. The past few years have seen the CDB issue a large number of loans to Chinese municipalities, causing its total assets (mainly loans) to soar to more than 15% of China’s GDP. Now that China is welcoming foreign investment, we can expect these development banks to be under more scrutiny, and for investors to select the one with the heathiest balance sheet.  Investment  We believe that the Export-Import Bank of China's senior unsecured notes (3.74% fixed coupon, maturity September 2021) offer an attractive yield of approximately 3.1%. This means that this bond provides an approximatively 50 basis point pick-up over Chinese sovereigns of the same maturity with no additional risk. In addition, last year saw a change to the taxation rules for Chinese onshore bonds, which now permit a three-year exemption on foreign institutional investors’ withholding tax on interest coming from Chinese onshore investments. (On this last point, it must be said that insufficient details have been released regarding tax clawbacks on previous investments or tax on investment after the exemption period, thus it would be prudent to check this information with a tax advisor.) Management And Risk Description: The Chinese financial market is just opening up to foreign investors and liquidity may still be an issue for both sovereigns and supras. The Export-Import Bank of China is closely dependent on the performance of the Chinese economy. Although a default doesn’t presently seem likely as the bank is owned by the state, China is an emerging economy and default is always a risk. Parameters: Entry: n/a Stop: n/a Target: n/a Time Horizon: n/a Minimum piece is 10,000,000 nominal CNY with 100,000 nominal CNY increments. Return objective is primarily repayment and coupon payment. Althea Spinozzi Fixed Income Specialist Saxo Bank Topics: Trade View China Government Bonds Bonds

  • UPDATE: Buy Lynas on rare earth strength
    by Eleanor Creagh on March 27, 2019 at 9:00 am

    We are updating our initial trade recommendation to buy rare earth minerals producer Lynas Corp. Upcoming downside and volatility risks may lead some investors to take profits, though our overall case remains intact. Strategic Trade / Buy Instrument: LYC:xasx Price Target: AUD 3.00 Market Price: AUD 2.17 Background: This is an update on our initial trade recommendation to buy Lynas Corp (ASX:LYC), a company that explores, mines, and produces rare earth minerals. Yesterday, Wesfarmers Ltd (WES) announced a bid to acquire Lynas at AUD 2.25/share, representing a 45% premium to Lynas' last close. This offer was subject to Lynas having its Malaysian operating licensing intact for a reasonable period of time. This license is up for renewal in September but is conditional upon Lynas removing 450,000 tonnes of residue from Lynas Advanced Materials Plant (LAMP), which the company has said won’t happen.  On that basis, considering Lynas was trading at AUD 2.40 in November 2018, before the Malaysian government imposed the licensing renewal conditions on the company, the bid is actually a 0% premium on Lynas’ fully licensed operations. With that in mind, it is no surprise that the offer looks considerably less generous and hence Lynas has rejected the offer unambiguously, with the CEO citing the bid as “opportunistic”.  Lynas explores, mines, and produces rare earth minerals. Rare earths are counter-intuitively not “rare” but are difficult to find in deposits that are not contaminated with other materials and with a concentration high enough to be mined economically. Lynas operates the world’s highest grade operating rare earths mine in Mt. Weld (a collapsed volcano), Western Australia, and a chemical processing operation, Lynas Advanced Materials Plant, in Kuantan, Malaysia.  Lynas is in a very unique position as it is only miner and processor/producer of rare earths worldwide outside of China. In a world of heightened geopolitical tensions, a non-Chinese supplier has a significant competitive advantage for some manufacturers and businesses wishing to diversify supply chains away from China. Chinese producers typically dominate the market have benefited from strong governmental support aimed at providing downstream consumers with a competitive advantage as the high-tech and green tech industries that rely on rare earths are crucial to propelling the next phase of China’s economic expansion. But although China is currently a major producer, the source is not sustainable and over the coming years China could become a net importer of rare earths, particularly of Dysprosium. Rare earths are crucial for a number of high growth, high-tech commercial industries including hybrid and electric vehicles, renewable energy (wind turbines), energy-efficient lighting, LEDs, advanced electronics, chemicals, and medical equipment. Without rare earths a number of high-tech industry applications would not be viable. Take the iPhone, for an example: screens are polished with lanthanum and cerium and within the phone is a magnet made with neodymium and praseodymium.  Management And Risk Description: There should be little doubt that Lynas is sitting upon a valuable asset and could be the target of other bids in the future from Wesfarmers and other possible bidders. While the company is currently in a bind due to the regulatory clash with Malaysian regulators, the bid from Wesfarmer’s does not take into account Lynas' exclusive position as a non-Chinese supplier, and the long-term asset value given the current trajectory for rare earths demand and is likely seeking to capitalise on the company’s current vulnerable position. Permanent magnets containing NdPr, of which Lynas is the second-largest producer globally, are a key enabler of electric vehicle technology, a sector which we expect to grow considerably in size becoming a game changer for NdPr demand. The problem now is the license renewal issues in Malaysia, the outcome will be binary and Lynas will be able to negotiate LAMPs ongoing operations or they will need to exit Malaysia and find an alternative processing plant for the RE they mine. Smartkarma have an excellent analysis of the ongoing issues and potential resolutions of this current bid.  This presents a key regulatory/political risk so for investors with a lower risk tolerance, taking profit at this point would present a 16% gain on the trade ideas entry price and would be advisable. The long-term investment thesis still remains intact, but those that continue to hold must be prepared for volatility in the share price emanating from heightened regulatory risk. Parameters: Entry: AUD 1.86 (original trade view, published September 20, 2018) Stop: AUD 1.12 Target: AUD 3.00 Time Horizon: long term Please find charts below. Eleanor Creagh Australian Market Strategist Saxo Topics: Trade View Australia Commodities AUDUSD

  • Upside potential in cotton
    by Ole Hansen on March 6, 2019 at 2:15 pm

    A significant speculative short-covering potential has emerged in cotton after hedge funds have driven the net-short to the highest since May 2007 following 30 weeks of selling. Medium Term / Buy Instrument: May19 Cotton option call strike 75: OCT/K19C75:icus Price Target: 80.00 cents/lb Market Price: 74.30 cents/lb Background: In the week to February 26 the net-short reached 21,000 lots with data covering the week to March 5 being available on March 8. Since peaking at 96.50 cents/lb last June the price on the first month futures contract hit a through at 69.53 cents/lb on February 15 before recovering. The negative sentiment up until now reflects expectations from several major forecasters such as Cotton Outlook, the National Cotton Council and the US Department of Agriculture that a production surplus, helped by a strong US harvest, will emerge this coming season.  The recent recovery to the current level just below 75 cents/barrel has partly been driven by expectations of a trade deal between the US and China could trigger increased cotton exports to China. Management And Risk Description: Going long cotton at this stage reflects a trade that goes against current fundamentals which point to larger US acreage and increasing ending stocks this coming season. The main reason for entering the trade is for a trade deal between the US and China to drive the price higher through short-covering. On that basis we chose to implement the buy through options on the May contract. That way we reduce our risk to the premium paid for the option. Please note that liquidity can be poor, especially outside US hours. In order to avoid unwanted slippage we recommend using limit orders when entering and exiting the market. We focus on the 75 cents/lb call on the May futures contract but please use the option chain (see example below) on the SaxoTraderGO or SaxoTraderPro for further inspiration. Parameters: Entry: Buy the 75 Call on May Cotton, ticker: OCT/K19C75:icus Stop: Use limit orders Target: 80 cents/lb on CKZ8 (representing an intrinsic value of $2500 minus premium paid plus remaining time value) Time Horizon: Before option expiry on April 12 Aprox. cost:  1.5 cents/lb or $800 per contract Option chain on cotton from the SaxoTraderGO: The May contract (CTK9): Long-term view using the first month continuation chart:  Ole Hansen Head of Commodity Strategy Saxo Bank Topics: Trade View Cotton Commodities

  • Why (and how) you need to be long inflation
    by Steen Jakobsen on March 4, 2019 at 12:00 pm

    Policymakers are taking yet another dip in the 'pretend-and-extend' punchbowl as both monopolies and central banks snap up assets across the board. No market trades freely, price discovery is zero, and it is time to get long inflation. Strategic Trade / Sell Instrument: 10-year US Futures Price Target: not specified Market Price: spot 121 19.5/32 Background: The ongoing talk about Modern Monetary Theory is getting out of control. Yesterday, I sent an internal note to my team outlining my view on MMT and the Great Policy Panic: "Rarely have I seen such a turnaround in the dominant narrative in such a short time... it's almost impressive (the speed and scale of the turnaround, that is – not MMT!). It appears as though we need to adjust out policy response book to reflect another leg of pretend-and-extend now that quantitative easing and low interest rates are finally being viewed as inadequate. It's remarkable how no one is discussing the fact that socialism, or statism, is already here! After all: • No market trades freely. • There is zero price discovery. • There is no marginal cost of capital allocation. In the face of all this, we see monopolies and central banks continuing their run of purchasing across the board. Without testing the premise, of course, we are doomed to make further mistakes." My conclusion? Be long – very long – inflation, particularly as we head into the growth low in Q4'19/Q1'20! All of this MMT talk, as well as the concept of "no price for infinite debt," is creating the potential for a major move in US interest rates. For 2019, the 10-year yield is way, way behind the move inflation. Look at the charts below on how five-year/five-year swaps, a key proxy for inflation expectations, are rising fast. Also read the following: • An MMT response on what causes inflation (Financial Times) • An 'explanation' of MMT (from Bernie Sanders' adviser Stephanie Kelton) Our trade on this would be: sell 10-year US Futures at spot 121 19.5/32 with a close at 122-29 (daily) Management And Risk Description: For those of you who are inclined to learn from history, I implore you to read Paul Volcker's book 'Keeping At It', noting particularly the chapters on how he and then-Treasury Secretary Connally took the US out of the Bretton Woods agreement with the policy at the time being: controls, tariffs (on Germany), devaluing the dollar and trying to ditch the trade deal in place with Canada! Parameters: Entry: spot 121 19.5/32 Stop: 122 28/32 on the close Target: 118 ½ Time Horizon: long term Also, please review the charts below. Steen Jakobsen Chief Investment Officer Saxo Bank Topics: Trade View Futures Macro GDP Indices Central Banks Equities Corporate Bonds Government Bonds

  • Copper rally to pause after best month in over two years
    by Ole Hansen on February 28, 2019 at 2:30 pm

    High grade copper was a star performer this past month on the back of tightening supply and optimism on several Chinese fronts. However, this could be an opportune time to hit the pause button. Short Term / Sell Instrument: HGK9 or COPPERUSMAY19 Price Target: $2.820/lb Market Price: $2.960/lb Background: Just like other industrial metals high grade copper has experienced a strong beginning to 2019. Following seven months of range-bound trading, the price surged higher during February en route to record its best month since December 2017. Tightening supply and optimism surrounding a trade deal between the US and China, together with recent tax and interest rate cuts in China, and a stronger CNY, have all helped support the recovery.  While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.  Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange. The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.  Management And Risk Description: Selling copper at this stage is going against the current trend, hence our relatively conservative price targets. We have chosen to place the stop above at $3.025/lb which is just above the 61.8% retracement of the June to August sell-off last year. We choose to take profit just above $2.815/lb, which represents a 38.2% retracement of the run up since early January. Besides the potential of a knee-jerk reaction to a trade deal the risk to this trade's success will also depend on the above-mentioned daily stock reports from the London Metal Exchange. With the trade parameters laid out we do not plan to update this trade recommendation on a regularly basis.  Parameters: Entry: Sell at current price around $2.965 Stop: $3.025/lb (1.5 ATR) Target: $2.82/lb (3.6 ATR) Time Horizon: 1 – 2 weeks.     Ole Hansen Head of Commodity Strategy Saxo Bank Topics: Trade View Copper Commodities

  • Why Danske offers long-term upside potential
    by Peter Garnry on February 28, 2019 at 1:00 pm

    Shares of Danske Bank have fallen by 44% since early 2018 on the firm's Estonian money laundering scandal, but Denmark's largest bank retains solid fundamentals. In our view, Danske shares have the potential to offer attractive returns for the patient investor. Strategic Trade / Buy Instrument: DANSKE:xcse Price Target: DKK 207.50 Market Price: 129.50 Background: Danske Bank is the second-largest bank in the Nordic region as measured by total assets. It was also a post-financial crisis success story as the bank managed a spectacular turnaround in its business, lifting return on equity from around 2-4% in the years after the financial crisis to 10-12% more recently. Investors were rewarded in the 2009-2019 period with Danske shares up 12.2% annualised including reinvestment of dividends. This return is at par with the MSCI Nordic Index in the same period, but at its peak in around mid-2017, Danske had outperformed the Nordic equity benchmark by eight percentage points (annualized, starting in January 2009), which is impressive for a banking stock. Danske Bank’s money laundering scandal, which came to light in early 2018 and related to issues at the bank’s Estonian branch in the years 2007-2015, has lowered the share price by 44% since it surfaced. The scandal is the biggest in Europe’s history and an embarrassment for Denmark as the country prides itself as a transparent country with high ethical standards. Shareholders are deeply concerned over the revelations and management's slow reaction to the scale and consequences of the scandal.  The Estonian branch’s non-resident business profited around DKK 1.7bn in the period 2007-2015; this implies penalties in the US of up to around $1 billion according to estimates provided by Bloomberg. Danske is being investigated by the US Securities and Exchange Commission, the Department of Justice and the Treasury Department, with the latter likely posing the biggest risk to Danske Bank. We also see a small probability of Danske Bank being cut off from the US financial system like Latvian bank ABLV was in 2018, though Danske Bank is cooperating with US authorities. The Financial Times reported back in January that consensus is looking for an aggregate fine of around $5bn while the Bloomberg Intelligence team covering banks put the estimate around $2bn. Both amounts can be dealt with by Danske Bank, particularly as the fines will drag out over years, diluting the impact. From an ongoing concern perspective, the fines are one-off items with some potential effect on the bank's continuing operations (likely a small impact due to the stickiness of banking business), so the impact on return on equity should be limited. Management And Risk Description: Danske Bank is naturally a high-risk investment given the 44% decline in the share price since early 2018 and the downside risks to fines from various financial regulators in the US and Europe. The ultimate risk is if the fine goes above USD 6bn as that would begin to eat into the bank’s buffer against the Pillar 1 requirement. Danske's money laundering scandal obviously carries the risk that client relationships will be lost, impacting the business negatively. Danske Bank also derives around 52% of its net revenues from Denmark, making the bank dependent on a strong economic outlook for the country. So far, Denmark’s macro numbers have outperformed those of other European countries despite the global slowdown. But should we experience a steeper slowdown that impacts Denmark as well, it would most likely increase loan impairments and lower return on equity. Should interest rates continue to go lower or just stay at current levels, it will act as an upper ceiling on return on equity. For shareholders there is also the risk of dividend cuts but currently sell-side analysts are still modelling a payout ratio of 50% of earnings despite the outlook and potential fines. The biggest risk to our target price is our assumption that Danske Bank can maintain a 10% return on equity. We are basing our assumption on the guidance from the bank, sell-side analysts' assumptions and recent history, coupled with the bank’s market position. Should the return on equity drop to around 6% due to macroeconomic reasons and business impact from the money laundering scandal, though, the fair price drops to DKK 157.60 – around 21% higher than the current market price. Given the historical relationship, the return on equity could drop to as low as 4% given the current price-to-book ratio. It our opinion the share price leaves a significant margin of safety, but clearly our return on equity assumptions are critical to the fair price estimation. Parameters: Entry: Limit buy in the DKK 120-140 range Stop: DKK 100 Target: DKK 207.50 Time Horizon: Until June 30, 2020 See charts below for more data on Danske Bank shares. Peter Garnry Head of Equity Strategy Saxo Bank Topics: Trade View Denmark

  • Trading Nvidia earnings via options
    by Peter Garnry on February 13, 2019 at 11:00 am

    A gloomy outlook in the wake of January's profit warning means high two-way volatility around chipmaker Nvidia's Q4 earnings release on Thursday. We look to trade the event via a long strangle options strategy. Short Term / Not Specified Instrument: Nvidia call and put options Price Target: n/a Market Price: 151.17 for the underlying stock Background: The graphics card market has been growing since the late 1990s, and Nvidia is arguably the largest supplier of GPUs to the consumer gamer market and increasingly to businesses driven by surging demand for machine learning applications across image recognition, self-driving technology, et cetera, and massive growth in datacenters driven by cloud computing demand. The company has five main end-user segments: 1) Gaming (56.8% of total revenue) 2) Datacenter (19.9% of total revenue) 3) Professional Visualization 4) OEM & IP and 5) Automotive In the past 12 months Nvidia delivered $12.4bn in revenue (+38% year-on-year) and $4.8bn in EBITDA (operating profit). Despite the company’s high revenue growth, the company had to adjust its FY'19 Q4 financial projections. The company reduced its Q4 fiscal guidance citing macro conditions (specifically in China), excess inventory (related to slowing cryptocurrency growth) and slower adoption of its new GPU chip. The reduced forecast could hint at a lacklustre performance in Q4 when the company announces earnings on February 14 after the close.  Performance Last year, Nvidia launched its new high-end chip on its Turing architecture. The company stated it was the fastest adoption of any server GPU in history. However, the company overestimated the adoption curve as the company is currently faced with a surplus in these high-end chips. On the medium range of the spectrum the firm underestimated its exposure to the cryptocurrency mining market, which it has also acknowledged. A recent report suggests Nvidia has a majority market share in the GPU mining sector. The 2017 bubble in cryptocurrency caused an increase in demand for GPUs and the subsequent decline in cryptocurrency prices caused demand for the mid-range GPUs to plummet just as quickly. The lack of demand for mid-market GPUs created an oversupply for the company. The firm's inability to accurately forecast GPU demand from China, datacenters, and cryptocurrency miners has caused it to reduce its revenue guidance by about 20% from $2.7bn to $2.2 bn.  Nvidia’s bad news unfolded in Q4, which saw the share price drop by around 57% from peak to bottom. The share price has since recovered somewhat despite the downward revision to guidance in late January. Sell-side analysts are expecting FY'19 Q4 revenue of $2.29bn, down 22% y/y, which is an astronomical collapse in y/y growth rates as Nvidia's Q3 revenue growth rate was 21% y/y.  Management and risk description The most significant risk facing the company now is the global macroeconomic outlook. A global slowdown or a worsening of the trade war between China and the US could result in further revenue pressure for the firm. Additionally, a prolonged bear market in cryptocurrencies would continue to hurt sales of GPUs that sit in the Gaming segment. A lack of funding going into AI applications and cloud computing solutions could impact sales of Nvidia’s higher-end chips. It will be interesting to see the company’s financials during its earnings release on February 14. Nvidia has tried to take most of the downside risk out of the company’s outlook with its late-January negative revision of the outlook, but more negative information could be revealed during the Q4 earnings releases and subsequent conference call. Outlook As for now, investors should remain wary of any upside in Nvidia. An extension of the trade deadline will continue to stifle the demand coming out of China, as well as the prolonged bear market in cryptocurrencies. The company’s FY'20 Q1 fiscal guidance should give the market insight into what management is expecting. If revenue misses the guidance and the forecast is substantially below the trend, this may cause the stock to drop. However, a beat of the estimates or a trade deal could support the price. The company is likely to experience revenue growth in FY'19. By how much and to what extent is this part of a larger trend will likely determine the opening price of this key technology stock on February 15. After the earnings release we will follow up with a longer-term view. Trade recommendation The short-term risk is very high due to the FY'19 Q4 (ending January 2019) earnings release after the February 14 market close as the outlook is extremely dynamic due to the situation in cryptocurrencies, China (gaming), datacenter, and automobile growth decay. We recommend a long strangle (buying volatility, see illustration below) over the earnings release. Historically Nvidia’s share price has moved around 7.9% in absolute terms around the earnings release and last earnings release saw massive volatility with the share price declining by 18.8%.   Tuesday’s close was $151.17 • Buy limit calls Feb 15 C157.50 in the interval $2.50 to $3.15 (last trade was at $2.80) • Buy limit puts Feb 15 P145 in the interval $2.75 to $3.35 (last trade was at $3.05) Assuming fills at the last traded prices on the call and put options, the combined premium is 3.9%. The call strike at $157.50 is 4.2% above the underlying price (last trade) and the put strike $145 is 4.1% below the underlying price (last trade). Assuming fills at last traded prices, the breakeven level on the upside is $163.35 and downside is $139.15. The strategy becomes profitable on the share price moving more than 8% in either direction. The investment recommendation has a natural expiration date on February 15 when the options expire. Parameters: Entry: as above Stop: n/a Target: an 8%-plus move in the share price Time Horizon: Options expire February 15 Note: Saxo Bank cryptocurrency analyst Jacob Pouncey also contributed to this report. Peter Garnry Head of Equity Strategy Saxo Bank Topics: Trade View Equities Corporate Earnings

  • Looking for EURUSD downside via put options
    by John Hardy on February 13, 2019 at 10:30 am

    EURUSD is heavy near range support and may push lower still as the Eurozone outlook sours more quickly than the outlook for the US, where the Fed continues to actively tighten. We trade the risk for lower EURUSD levels via a put option, given very low implied volatility. Short Term / Sell Instrument: EURUSD put option, strike 1.1200, expiry May 15 Price Target: Spot price below 1.1000 Market Price: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13) Background: EURUSD is heavy near range support, with the turnaround in the US Federal Reserve guidance since the hawkish December Federal Open Market Committee meeting unable to engineer a more profound sell-off in the US dollar as the Eurozone outlook has worsened so drastically that the European Central Bank may be forced to consider easing measures at coming meetings while the FOMC is actively tightening. EURUSD may eye new local lows for the cycle, driven chiefly by concerns for the Eurozone economic outlook and ECB being a first mover in bringing new policy accommodation. As well, given the weakening outlook for global growth, markets may have been a bit premature in celebrating the Fed’s and other central banks’ turn away from a tightening bias as historically, an easing cycle from central banks only arrives at this point in the cycle due to mounting worries of recession and with a backdrop of very weak asset markets. A fresh sell-off in global equity markets could support the US dollar, typically a safe haven from a liquidity angle during times of crisis. A wildcard risk for the euro side of the EURUSD equation is the risk of fresh existential worries driven by populist demands for expanding fiscal stimulus and concerns on sovereign debt funding at the periphery.   Management And Risk Description: Technically, the EURUSD softness points to the range lows as a possible trigger for a more profound move lower in coming months. We take a three month put option position, in the hopes of the price action moving well below 1.1000 over the three month time frame.  Consider longer dated options and different strike prices for a different risk/reward profile. Risks: risk to this trade is 100% loss of the amount paid up front for the option premium. Parameters: Entry: 72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13) Stop: n/a Target: Price target: Spot price below 1.1000 Time Horizon: Short-term    FX Trade View: Downside via EURUSD put option Chart: EURUSD The market looks heavy near the ultimate range low posted late last year at 1.1216. Downside optionality looks “cheap” for two reasons. First, it is rather cheap as implied volatilities are quite low relative to the historically range due to the lack of recent volatility in EURUSD and lack of anticipation that anything dramatic is set to happen. EURUSD implied volatility is currently below 6.5% for 3-month options. Second, we have to remember the interest rate carry is rather high for EURUSD and means that the forward price (on Feb 13 with a spot price of 1.1320) is 1.1405 for the May 15 expiry date.    Longer-term chart: On a longer-term chart, traders may note the lack of notable support levels should the support levels below 1.1200 – perhaps the round, psychological levels starting with 1.1000 the most important if the pair finds itself on the way down.   John Hardy Head of FX Strategy Saxo Bank Topics: Trade View EURUSD

  • A tactical USDJPY long on November seasonality
    by Kay Van-Petersen on November 7, 2018 at 10:00 am

    Saxo Bank Head of APAC Macro Kay Van-Petersen looks at a long USDJPY trade ultimately targeting new highs above 120.00 on the basis of historical seasonality. Medium Term / Buy Instrument: USDJPY Price Target: 116.00, 117.00, 120.00 Market Price: 113.04 Background: The Macro Monday book goes long $20 million of USDJPY from the 112.78 level with the thesis that we will soon challenge the 114.55 highs and break through 115, which would open up the cross for a potential move to 120. We see a target price at new highs north of 116.00 to 117.00 for half the position, with the balance looking for a 120-plus handle. Apart from the recent price action of USDJPY – a lack of yen buying in the October equity sell-off plus overall higher US yields and rates – the main rationale for this trade is based on historical seasonality for USDJPY in November. As you can see from the five-year seasonality grid below, the average historical move in USDJPY has been +401 basis points, with the skew being +920 bps to -97 bps. It's worth noting that on a 10-year historical range, the average drops to +198 bps and the skew, while still asymmetrical, drops drastically from +920 bps to -108 bps. USDJPY closed last week over the key 200-week moving average of 113.03 – a second consecutive close above that point would bode well for USDJPY bulls. Management And Risk Description: There are both fundamental as well as technical risks to this tactical break-out higher call. First, a technical pullback and a weekly close below the 100-week moving average of 111.32 would potentially put this cross back into bearish control. Second, any kind of sharp and prolonged pullback in US yields and rate expectations could move the cross lower. Third, if we were to potentially see a blow-up in emerging markets or a massive dislocation in equities (S&P 500 down 5% in one day, VIX over 30, etc.) then the yen may get a bid. Finally, while positioning in yen shorts is not at extremes against the USD, on a broad basis the market is quite long the US dollar, which always invites positioning risks. Parameters: Entry: 112.78 Stop: n/a Target: 116.00-117.00 Time Horizon: One to three months Some final thoughts and a contrarian view Given that USDJPY volatility has been relatively subdued, one could also look to express this trade through long calls and call spreads, or even out-of-the-money 115 calls. You could also look to play a six-month one-touch with a 120 strike; with an expiry of 26 April you would be paying about 18% in premium. Remember as well that these can always be closed out before 120 is reached and/or prior to expiry. Finally, those looking to play the reverse of this trade view could potentially put their stops above the recent 114.55 highs, targeting a break for 111.32.   Kay Van-Petersen Global Macro Strategist Saxo Bank Topics: Trade View USDJPY