2. 2 www.econotimes.com
Market Recap
● European stocks were largely weaker as oil prices
dropped 4pct, while Germany's weak business sen-
timent raised concerns about the outlook for the
global economy.
● The pan-European FTSEurofirst 300 index fell 0.8
percent in early trade, it climbed 3pct on Friday to
mark its first weekly gain for 2016. Germany's DAX
dropped 0.5 percent to 9,717.15 and France's CAC
40 lost 0.7 percent to 4,306.61. Britain's FTSE 100
slipped 0.6 percent to 5,863.96. Greek stocks rose
1.3 percent after Standard & Poor's raised Greece's
rating to B- from CCC+ on Friday.
● In a quite contrast to European equities, Asian
stocks gained 1.5pct and moved further away from
last week's four-year low on stimulus hopes from
BoJ and ECB. Shanghai stocks added 1 percent and
Tokyo's Nikkei ended up 0.9pct . HK’s Hang Seng
Index closed up 1.4 pct at 19,340.14 points.
● Oil prices plunged 4pct as Iraq announced record-
high oil production feeding into a heavily oversup-
plied market. Brent crude dropped $1.35 to $30.83
per barrel at 0851 GMT, losing more than 4 percent
from Friday's closing price, when Brent surged 10
pct. U.S. crude traded $1.15 lower at $31.04/barrel.
● Gold inched higher on expectations that the U.S.
Federal Reserve may have fewer chances to raise
interest rates this year in the face of a unstable
global economy. Spot gold rose 0.2 percent at
$1,100.56 per ounce by 0638 GMT, after gaining
nearly 1 percent last week. U.S. gold for February
delivery gained 0.5 percent to $1,101.30 an ounce.
Treasuries
● 10-Year U.S. Treasury yield stood at 2.058 per-
cent vs U.S. close of 2.048 percent on Friday.
● The 10-year JGB yield fell 1 basis point to 0.220
percent, while the 30-year yield fell 0.5 basis point
to 1.175 percent, near one-year low of 1.170 per-
cent touched earlier this month.
● UK Gilts opened 8 ticks higher than the settlement
of 119.07, as the market opened risk off due oil
prices failing to sustain a bounce. Asian equity
markets had enjoyed a better start to the week as
the US snowstorm fuelled thoughts of increased
demand.
● German bund futures opened 13 ticks lower at
161.18,while Greek 2-year government bond yields
fell 9 basis points to 13.48 pct after S&P's rating.
● Australian government bond futures were trading
softer, with the 3-year bond contract off 1 tick at
98.060. The 10-year contract eased half a tick to
97.2650, while the 20-year contract edged down 1
tick to 96.7600. New Zealand government bonds
gained slightly, with yields 1 basis point lower
across most of the curve.
Market Briefs
● Oil falls 4% on swelling oversupply.
● Iraq says December oil production reached record
high.
● Saudi Aramco chief says not cutting oil and gas
investment.
● Brent crude down to $30.72/barrel, from earlier
$32.81 peak.
● CAD, NOK sharply decline as oil falls. USD/CAD
plays 1.4127 to 1.4220.
● EUR/USD gains to 1.0835 fm 1.0789 but easier
into NY.
● USD/JPY back down to 118.18 from 118.85.
● Norway Central Bank Gov: Oil price moves since
mid-Dec not fundamentally altered economic situa-
tion.
● Norway Central Bank Gov: Fallout from lower oil
price gradually becoming visible in economy.
● Spain's Socialists tell Rajoy to form government or
move aside.
● S&P raises Greece rating after bank recapitaliza-
tion, reforms.
● Germany Jan IFO Expectations 102.4 vs previous
104.6 revised. 104.1 expected.
● Germany Jan IFO Current Conditions 112.5 vs
previous 112.8. 112.8 expected.
● Germany Jan IFO Business Climate 107.3 vs previ-
ous 108.6. 108.4 expected.
● UK Jan CBI Trends - Orders -15 vs previous -7. -
10 expected.
Institutional Positions
● Buy GBP/USD 2m European digital put strike 1.39, ko
1.34- Societe Generale.
● We remain bearish on the ruble in the short and medium
term- Danske Bank.
● Barclays: We recommend being long USD against CNH,
KRW and being short TWD/INR
● EUR/USD puts look historically cheap relative to calls
across the curve, offering a compelling opportunity to ex-
press downside through options- Barclays Research.
● There is some scope for the skew in the 1m volatility smile
of USD/MXN to retreat as USD/MXN stabilizes after the
recent sell-off- Barclays Research.
● Barclays Research: We recommend selling USD/MXN 25δ
1m RR delta hedge (buy put, sell call).
● J.P. Morgan: Stay long USD/SGD from 1.3721 July 24,
marked at +5.11%.
3. Economic Data Preview
● (0900 ET/1400 GMT) The national statistics insti-
tute of Mexico is set to release its unemployment
data for December, after the index dropped to a
seven year low the prior month. Also, economic
activity data for November will be released, after it
notched its weakest showing since July the prior
month.
● (1030 ET/1530 GMT) The Federal Reserve Bank of
Dallas is set to release its manufacturing business
index for January, the index stood at -20.1 in De-
cember.
Key Events
● (1300 ET/1800 GMT) ECB President Draghi's
Speech.
● (1330 ET/1830) FedTrade Operation 30-year Gin-
nie Mae (max $1.175 bn).
Top News
● German business morale dropped in January, sug-
gesting growing concern among company execu-
tives in Europe's largest economy as emerging
markets slow and financial markets get off to a
jittery start in 2016. The Munich-based Ifo eco-
nomic institute's business climate index, based on
a monthly survey of some 7,000 firms, fell to 107.3
from a downwardly revised 108.6 in December.
● Mortgage lending is a major source of difficulty
for euro zone banks but macro prudential meas-
ures have so far prevented adverse developments,
the head of the euro zone's banking regulator told
the Slovenian Press Agency on Sunday. Ultra low
interest rates across the euro zone have increased
the chance that asset bubbles will be formed and
the European Central Bank has already warned that
commercial real estate has become overpriced.
● Japan's exports fell the most in more than three
years in December from a year earlier, stoking fears
of economic contraction in the final quarter of
2015 as a slowdown in China and emerging mar-
kets takes its toll on the export-reliant economy.
Ministry of Finance data on Monday showed ex-
ports fell 8.0 percent by value in the year to De-
cember, down for the third straight month, marking
the biggest drop since September 2012.
● Federal Reserve officials are playing it cool for
now, but roughly $2.5 trillion of stock market value
wiped out in the past three weeks and a possible
consumer pullback could throw the Fed off its
course of gradual interest rate hikes.
● The darling of the Davos political and financial
elite, Christine Lagarde has a second term at the
helm of the International Monetary Fund sewn up
just days after nominations opened, despite facing
possible trial in France.
● The Norwegian economy is developing in line with
projections made in December, central bank Gov-
ernor Oeystein Olsen told reporters on Monday
ahead of a meeting with the country's prime minis-
ter and finance minister.
● Bank Indonesia Deputy Governor Perry Warjiyo
said the central bank will ease its monetary policy
more, although when that will happen depends on
domestic and external conditions.
● Singapore's central bank said on Monday it was
keeping its 2016 inflation forecasts unchanged
even after a renewed slide in oil prices, while core
inflation edged higher in December due to higher
services costs. The full-year forecasts are being
kept at -0.5 to 0.5 for all -items inflation and 0.5 to
1.5 percent for core inflation, the Monetary Au-
thority of Singapore (MAS) and the Ministry of
Trade and Industry (MTI) said in their monthly
statement on inflation.
3 www.econotimes.com
4. 4 www.econotimes.com
FundamentalAnalysis
BoJ unlikely to ease, but to keep dovish stance
The Bank of Japan is expected to make no changes to mone-
tary policy at its meeting on Friday and is likely to maintain
its commitment to raising the monetary base by ¥80tn on an
annual basis until its 2% price stability target is both achieved
and maintained. In addition to BoJ's meeting, the FOMC on
Thursday and dynamics of general risk sentiments will be the
key drivers for USD/JPY.
The fluctuations in global risk sentiment continues to drive
the safe-haven Japanese Yen. Last week USD/JPY plunged
below 116 temporarily, but recovered to above 118 when
Japanese government officials were reportedly "closely moni-
toring the markets," and on the back of improving risk senti-
ment with the ECB hinting of a further easing.
"We maintain our baseline scenario for the BoJ of no further eas-
ing, but with a risk of reactionary easing in April if USD/JPY falls
persistently below 115 or the Shunto wage negotiations result in
a weak wage growth", says Barclays in a research note to its cli-
ents.
However, the sharp dips in both USD/JPY and Nikkei have
increased market concerns about additional easing. The Nik-
kei newspaper also reported that the renewed decline in oil
prices will likely to force the BoJ to cut its FY16 Core CPI
forecast to 1% or lower from the current 1.4% and postpone
the timing of achieving 2% from "around H2 FY16," putting
an additional easing back on the table.
The BoJ’s stance is that while the global market remains weak,
domestic demand remains firm and the inflationary trend
should also continue to improve. The stimulus measures
should provide support to the economy. The bank’s outlook
on economic growth is still above the potential growth rate
(around 0.5%). Unless corporates start to feel uncertainty
regarding hiring and investment, or demand continues to
worsen, the BoJ believes that the 2% inflation target ulti-
mately will be achieved. For this reason, the bank does not
consider additional QQE measures necessary.
Further easing, if decided, may include an expansion of annual
purchases of JGB, ETF, and J-REIT by JPY10trn (to JPY90trn),
JPY1trn (to JPY4trn), and JPY60bn (to JPY150bn), respec-
tively. Nevertheless, analysts believe that the further expan-
sion of QQE will have more limited effect on the JPY amid
external headwinds of fragile risk sentiments.
Investors keenly watch December Core CPI, December Indus-
trial Production and December labor market data on Friday.
Barclays forecasts December Core CPI to accelerate to +0.2%
y/y (consensus: +0.1%) from +0.1% in November. It looks for
a second consecutive month of decline in December Industrial
Production by -0.3% m/m (consensus: -0.3%) after -0.9% in
November.
The labor market data is expected to remain unchanged with
December unemployment rate at 3.3% (consensus: 3.3%) and
job/applicants ratio at 1.26 (consensus: 1.26) versus 1.25 in
November. The jobless rate remained below 3.5% (equivalent
to NAIRU) for a while, and labor supply and demand has be-
come tight. Meanwhile, the rate has been volatile during the
past few months (3.4% in September, 3.1% in October, 3.3%
in November).
5. 5 www.econotimes.com
Economy Watch
● Euro area core inflation is set to increase but inflation is still far from the ECB's 2% inflation target- Danske Bank.
● The UK’s current account deficit is forecast to narrow from 5.1% of GDP in 2014 to 4.0% through 2017- Scotiabank.
● The pace of UK CPI inflation is expected to reach only 1⁄2% y/y by mid-2016 and will remain below the BoE’s 2% target
through 2017- Scotiabank.
● The UK economy is expected to maintain decent growth of around 2% this year, down from 21⁄4% in 2015 and 2.7% in
2014- Scotiabank.
● Bank of Canada forecasts no GDP growth for Q4 15.
● Germany has slightly reduced 2016 expected growth rate by 0.1 percentage points to 1.7 percent - Der Spiegel.
● Higher employment in Poland, relatively high wage growth and negative inflation should support high growth rates of pri-
vate consumption during 2016 and going into 2017- Nordea Markets.
● Poland's growth remains on track to reach around 3.5% in both 2015 and 2016 and growth momentum is likely to remain
rather stable during 2016- Nordea Markets.
Policy Watch
● The Fed is likely to be reluctant to raise rates in the current environment, with a low oil price, low inflation expectations,
risk-off sentiment in US equity markets and weak key economic figures- Danske Bank.
● We do not expect movement from the Fed in January, Banxico should remain on hold on February 4- Barclays Research.
● BoE monetary policy will remain highly supportive of growth, with expectations for policy tightening continuing to be
pushed back- Scotiabank.
● Markets are pricing the Fed March hike with a 26% probability - which is too little, if risk appetite improves as expected.
● The path of oil prices is crucial to the timing and extent of rate cuts in Russia.
● BoC will remain on hold at least during the first half of the year- Barclays research.
● Eonia forwards are now pricing c. 80% chance of a 10bp rate from ECB in March.
● The FOMC will reiterate the data-dependency of its hiking path, without giving strong signals about its actions in March-
Barclays Research.
● We expect no further easing from BOJ, but see a risk of a reactionary easing in April if USD/JPY falls persistently below
115 or the Shunto wage negotiations result in a weak wage growth- Barclays.
● Westpac expects RBNZ’S OCR cuts in June and August.
Trade Views
● EUR/PLN to trade at 4.5 in three months and gradually strengthening towards 4.25 by year-end- Nordea Markets.
● PLN will continue trading with a significantly political risk premium, at least until the details of the CHF-loan conversion law
are public, but most likely through the year- Nordea Markets.
● Any dips in the USD/RUB on improved global risk sentiment due to positivity in Chinese data are auspicious moments for
USD/RUB and the EUR/RUB buyers- Danske Bank.
● Until there are more solid signs that the outlook for commodity prices have turned, we would favor selling rallies in the CAD
and the AUD vs the USD- Rabobank.
● Depressed risk appetite could continue to lend EUR support going forward and keep the AUD and the CAD on the defen-
sive – Rabobank.
● A weaker EUR would clearly be a useful tool in the ECB’s efforts to restore inflation back towards its target and to reduce
the risk that expectations of near zero inflation become entrenched in the euro zone- Rabobank.
● With the improving risk appetite and the US data, the safe haven JPY action will be unwound, so that we could see the
USD/JPY above 120 again- Nordea Markets.
● Barclays expects further GBP weakness against the USD but not the EUR by year-end.
7. 7 www.econotimes.com
Currency Derivatives
EUR/JPY backspreads back in action for speculation - Capitalize on 1W HY IVs
The gradual increase in negative delta risk reversal numbers signify the OTC FX sentiments towards downside risk, as a result,
puts seem relatively more expensive than calls as bearish momentum intensified in a long run.
While IVs are huge (1w-14.5%), and it is also gradually increasing from 1m-1y expiries that would mean that EUR/JPY's down-
trend is intact in long run. But OTC volume index has not shown convergence with this indication.
These negative risk reversal is moving in tandem with rising implied volatilities which is quite reasonable as the volumes must
also have been increased. It has been edging higher in case of EUR/JPY from 10.4% (1M) to 10.8% (1Y).
Our recent observation on the IV factor of ATM contracts with 1w expiry of Yen denominated currency crosses tops the list
and same is the case with risk reversal table for highest hedging activities eyeing downside risks.
As we can very well understand the hedging activities of downside risks are mounting up, as a result ATM Put options seem
costlier. Volatility smiles most frequently tells that traders are willing to pay higher implied volatility prices as the strike price
grows aggressively out of the money.
Hence, with the current spot FX is trading at 130.92, the recommendation is to use higher vols to short ITM puts and add an
extra-long on put with 1M expiry in the strategy.
For fresh short build up positions, gazing at short term upswings short 1 lot of 3D (0.5%) ITM puts with positive theta values,
simultaneously go long in 2 lots of 1M ATM -0.49 delta put and (use shorter expiries on short side as stated in the strategy).
Traders tend to perceive this put ratio backspreads is more suitable for bearish trend, because it employs more puts. However,
it is actually a volatility strategy.
Deploying the position when implied volatility is spiking higher and waiting for the inevitable adjustment is a smart approach,
regardless of the direction of price movement. Based on volatility and time decay, the strategy is a “price neutral” approach to
options, and one that makes a lot of sense.
9. 9 www.econotimes.com
Technical Analysis
GBP/AUD faces strong support at 2, good to buy at dips
Harmonic pattern Formed – Bullish Gartley Pattern
Potential Reversal Zone (PRZ) – 2.
● The pair is trading in a narrow range around 2.032-2.045 for the past two trading session.
● GBP/AUD is facing minor resistance around 2.050 (20 day 4 HMA) and the break above will take the pair to next level 2.066
(200 day 4 HMA)/2.09700.
● Overall trend reversal is only above 2.100.
● On the lower side major support is around 2.017 and break below targets 2/1.9800 level.
It is good to buyat dips around 2.025-2.030 with SL around 2 for the TPof 2.0950
10. 10 www.econotimes.com
Trade Idea
We prefer to short GBP/USD on rallies
● The Cable has made a high of 1.43626 and started to decline from that level. It is currently trading at 1.42750.
● Short term trend is weak as long as resistance 1.4365 holds. Any break above 1.4365 will take the till 1.4400/1.4500 level.
● The upside is capped at 1.43300 (cloud top) and break above 1.4330 will take the pair till 1.4362 (22nd Jan high)/1.4450
(cloud bottom).
● Overall bearish invalidation is only above 1.4500.
● On the lower side minor support is around 1.4250 and break below targets 1.4200/1.4120/1.4070.
It is good to sell on rallies around 1.4300-.4305 with SL around 1.4365 for the TPof 1.4200/1.4120
RESISTANCELEVELS SUPPORT LEVELS
R1-1.4365 S1-1.4250
R2-1.4450 S2-1.4180
R3-1.4500 S3- 1.4120