The Volatility Playbook for The Event Risk Ahead

With a 32% chance of a 50bp cut priced into the rates markets for the September FOMC, it feels on balance, that if anything, Powell will be more hawkish than current pricing is suggesting and it could be a USD positive affair.

As detailed on Friday, I think most were hoping to hear from vice-chair Richard Clarida, as he is considered the true spokesman of the Committee. However, the full agenda has not been announced, but when it is, you’ll see it here on Thursday. We are due to hear from RBA Governor Lowe, who will close out the proceedings on Sunday (02:25aest), so this opens up the prospect of AUD gapping risk on Monday – something for all AUD traders to consider.

Challenges for Monetary Policy

As discussed, the title of the conference is “Challenges for Monetary Policy”. So, with one explanation for the recent yield curve inversion, and the incredible buying taking place in the longer-end of the curve being the belief that monetary policy will not save us should we see a far more aggressive downturn, this title is incredibly relevant. The objective of the conference will, therefore, be about installing a belief that monetary can save us if we see a downturn and while most the speeches will be of an academic nature, I expect central bankers to drill home that they still have the resources to support economics.

Unprecedented policy coordination

I also want to pass over this white paper from the Blackrock Investment Institute, which now includes Stanley Fischer (former vice-chair of the Fed) and Philip Hilderbrand (ex-chair of the Swiss National Bank). For anyone who wants to know one way we may see central bankers respond, read this….it is getting a lot of attention from strategists.

It’s fitting that we hear more and more noise about a potential fiscal stimulus from the German government. While any fiscal program will take time to play out, if we marry this news flow with a dovish shift from the ECB in its 12 September meeting, then EUR assets look incredibly interesting longer-term. EURUSD on the weekly is ready to make a move. Which way, we shall see, but when this pattern breaks, then it will impact global markets.

There is not expected to be any key representation from the ECB at Jackson Hole, but EUR traders will be watching PMI data due on Thursday, and any deterioration here will only build up expectations that the ECB cut its deposit rate to -60% and talk up renewed QE.

Weekly volatility report

I have updated the volatility report for options that expire on Monday, thus capturing the event risk over the weekend, with the markets implied moves based on various options strategies. I explain my logic in the webinar:

Aside from classic realised volatility measures, such as the ATR and Bollinger bands (BB), which traders use effectively to assess risk, and even entry points (BB). I have added the weekly Commitment of Traders (CoT) futures positioning (and change) from non-commercial players for key markets I look at. The implied rate path and what’s expected from select central banks for the September meeting and also over the coming 12 months, and 1-week risk reversals, which offer possibly the best guide on sentiment and perceived directional risk. I have percentile ranked these, which offers context into where the absolute number is in relation to its 12-month range.

I like to use this as a holistic oversite at the start of the week, to offer insights into expected moves, while offering insights for our risk-to-reward assessment.

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Chris Weston, Head of Research at Pepperstone.

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