It is fair to say, Bloomberg’s Richard Breslow dares to say - without being trite, that this really is a very interesting pivotal week we are heading into.
The FOMC trying to thread the needle of moving on, keeping everyone calm and keeping a wary eye on a geopolitical landscape that isn’t getting better. Greek negotiations that layer existential questions of problem resolution paralysis on top of default and Grexit. And let’s not forget MERS, Turkey coalition issues, Hong Kong bomb makers, Ukraine and meaningful MPCs given Kuroda’s comments, CHF wariness and NOK economic projections. Feels to me like Act 4 of Macbeth, “Double, double toil and trouble.” Lots of predictions, forecasts and pronouncements, but what will it all really mean and should we beware what we ask for?
Really no good news from Europe on the Greek front. Yet everyone still thinks the base case is some cobbled together patch. EUR/USD hasn’t made a serious attempt to get back below 1.1100 in the last week and the way it has traded around that level it is certainly a support area to be watched and respected. So 1.11/1.14 remains a very profitable range to trade. Greece is saved on the bid. Coeure and Merkel on the offer. EUR vols are higher but more reflective of intra-day opportunities than belief in a breakout
The one question that markets haven’t addressed is the third alternative beyond Greece is saved and Grexit. That is, default and no exit. That will be the biggest threat to the EU, EUR and the lift-off scenario. Unlikely SNB makes a move before this plays out
Take a look at YTD USD/JPY, and despite the end of May leap, it has done very little. It trades like 120.00 is pretty much fair value and forays too far away from there are the aberrations. And I’m a USD bull.
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Bonus view: AUD/NZD looks unstable at these lofty levels
Equities are certainly sagging today, but still from lofty levels. Shanghai at 5100, SPX near its 2100 pivot. Worth a watch, but not in panic mode. Bonds have had a well publicized tough run, but they still are the go-to haven when some other markets have a rough day
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So what is this telling me? FOMC will do backflips to introduce the rate rise concept with every caveat, bell and whistle attached. They will hope to keep the yield curve relatively flat and refuse to commit. Make no mistake, they would love to raise rates but, with apologies to Willie Nelson, they don’t wish to be cowboys
Another trading opportunity to keep in mind is that USD long positioning (per the CFTC) continues to rise, but the FOMC will highlight that all decisions are data dependent. That means reaction (over-reaction?) to numbers will be tradeable events
