Traders unwinding G20 hedges, but can the good-will last?

Throughout most of last week, we focused on the risk that the G20 Summit held a gapping risk, knowing that the bar was low for a positive surprise.
Chris Weston
Currency exchange notice board

Now, while the bulk of what we’ve seen was in-line with expectations, and aligned with what was reported in the Chinese press last week. However, risk assets have warmed to what they’ve heard, and traders are clearly unwinding their G20 hedges today.

Looking around the markets, we can see the S&P 500 and Nasdaq 100 futures are up 0.9% and 1.2% respectively. Asian equity markets are firmer, notably in China, which is over 2%. In FX land, USDCNH (offshore yuan) is 0.3% lower, although it has come firmly off it’s earlier low and perhaps reacting to the contraction in the Caixin and NBS manufacturing report. USDJPY has followed S&P 500 futures higher and is tracking at 108.24.

Interestingly AUDUSD is a touch lower on the day, as is EURUSD, resulting in the USDX up smalls. The NOK is the best performer in G10 FX, largely as a result of a strong move in crude on the open, while the TRY is finding buyers as volatility sellers encourage carry to outperform.

G20 review

In my mind, there are too many questions that remain, and there’s been no real progress on the key sticking points to feel this is in any way a game changer, at this stage. Certainly, the US and Chinese corporate sector, or the Federal Reserve, will have not heard anything that gives them real confidence that the G20 Summit changes the script. However, the highlights that spring out:

• Trade truce – there will be no new tariffs, for now, on the remaining $300b of Chinese exports (to the US)

• Trade truce – A commitment to resume talks that recently fell apart – when do these formally start?

• Political landmine – the US will loosen restrictions on US tech company sales to Huawei and the wider China tech space. There is a credibility angle here, and we have already seen huge condemnation from cross-parties from the likes of Chuck Schumer and Marco Rubio.

• In return, the Chinese will commit to buying increased amounts of ag products from US farmers

• Improved visa treatment for Chinese students in the US

We are most focused on the schedule and future meetings between the two respective trade teams, in the search for real substance and the leaders to agree. Like many, I am cautious, as it feels these policies are cosmetic and designed to keep financial markets in check. We are watching domestic pushback, notably on the political fallout from Trump’s easing of pressure on Huawei – it has already been met by angry protests from the Democrats (specifically Chuck Schumer) and on Trump’s Republican side, namely Marco Rubio, who is threatening to put the restrictions (on Huawei) back to Congress.

Fed speakers to watch

The question we need to ask is whether these outcomes give the Fed any clarity and I’d argue not really. It will, therefore, be interesting to hear the thoughts, direct from the source, with Fed vice-chair Richard Clarida due to speak shortly at 16:10aest, and then NY Fed president John Williams speaks tomorrow at 20:35aest. It feels too early to believe the G20 fully removes the threat of a 50bp cut, especially when we get the US ISM manufacturing (00:00 aest) and non-farm payrolls (Friday (22:30aest) this week. So, expect the USD, gold and equities to be sensitive to this narrative.

We can also add the fact that we’ve heard agreement between Russia and OPEC to extend the production output curbs into 2020, and we’re currently seeing Brent and WTI crude gaining 2% apiece.

I focus on the Fed here, but consider tomorrow’s RBA meeting (14:30aest), as this is a genuine risk event for traders holding an AUD or AUS200 exposure over the announcement. The AUDUSD set-up looks constructive, although the risk of a failed break above the neckline of the double-bottom is increasing. As far as the playbook and the key considerations that I feel should be assessed, it feels as though the AUD upside should be greater than that of any downside move. Although the case for a cut or for rates to be held for this month is finely balanced, and I wouldn’t like to be too exposed to this meeting.

AUD playbook:

• Looking at Aussie cash rate futures pricing, a cut tomorrow is priced at 69%. We can make a strong case for the RBA to cut or to hold. But this pricing suggests we could get a decent spike higher or lower at 14:30aest, and it poses a risk to traders holding AUD exposures over the announcement.

• AUDUSD overnight implied volatility sits at 13.03%%, residing at its 57th percentile, but the period in May masks the reality of its current elevation. Through options pricing, we can see this equates to a 42-pip move (with a 68% degree of confidence) in either direction, with the one standard deviation range at 0.7042 to 0.6958. I have charted this, as well as increasing the level of confidence to 80% of how far price may move (from spot) and see price contained in a 0.6930 to 0.7066 range.

• 18 of 26 economists are calling for the cut, with all of the ‘Big-4’ forecasting easing.

• A quick glance at the weekly futures trader’s report (CFTC data), and we can see ‘non-commercial’ traders (predominantly those who use FX futures to speculate) hold a net short position of 66,320 contracts

The bottom line is this is a genuine risk event for traders. Some love this backdrop and will trade around the announcement. Others will see the implied vol and binary nature of the event risk and reduce exposures. But this is the crux of event risk management.

Sign up here for my Daily Fix or Start trading now

Chris Weston, Head of Research at Pepperstone (Read Our Review)

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US