CROSS ASSET: BofA: Potential For Rates And FX Vols To Recouple Over '24
Jan-11 15:11
Bank of America write “relatively high implied volatility levels in the rates space vs other asset classes has been a significant feature of the market dynamic over the last couple of years.”
- “This decoupling makes sense in a context where the outlook for the US economy is relatively contained in between soft-landing scenarios and scenarios of steady resilience, where rates are the main shock absorber for the broader market dynamic.”
- “The role of rates as the main shock absorber is likely to fade over '24 as the Fed starts to deliver on policy easing and risks to the outlook stay skewed to the downside. FX vol may take some of that mantle from the rates space. We expect: (1) lower vol in the rates space, with the left side of the grid leading the way, and a potential re-steepening of the term structure of rates volatility; (2) FX volatility to stay supported and for levels to come off the low '23 base.”
- “A wide range of outcomes support hedging tail scenarios (hard landing or re-acceleration, in particular). We see scope for clients to express these tail hedges in the relatively cheap FX vol space, particularly vs a relatively rich rates vol context. The potential for a recoupling of FX and rates vol may also support contingent hybrid expressions where longs in FX vol are financed by selling rates vol (through carving out portions of the range of outcomes).”
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GBP: Post-US CPI GBP Weakness Continues to Pervade
Dec-12 15:10
- GBP/USD's pull lower is on decent volume, with the post-CPI pullback helping tip cumulative futures volumes to 25% above average for this time of day. The USD-driven move in the pair puts 1.2503 as first support, with the 200-dma just below at 1.2492.
- GBP losses also evident against EUR/GBP, which has defied a potential bear flag formation to break higher and top the 0.8600 handle in recent trade - touching the best level since Dec01 and nearing notable resistance at 0.8635.
- USD vols are edging lower as they factor out the CPI, however EUR and GBP cross vols remain supported ahead of the ECB, Fed and BoE decisions due later this week - EUR/GBP one-week vols are holding either side of 6 points - the highest level since September.
US: Yellen: "US Economy On Path To Soft Landing"
Dec-12 14:58
Wires carrying comments from Treasury Secretary Janet Yellen, speaking at the Wall Street Journal's CEO Council Summit, stating that, "inflation expectations well under control," and the US economy is, "on path to soft landing."
- Yellen says, "inflation is meaningfully coming down," and she, "sees no reason why inflation shouldn't come down to fed's target."
- Yellen says the labor market, "remains strong but is cooling," and "wage increases continuing at healthy pace."
- States, there is, "no reason to believe last mile will be especially difficult," and the economy, "can continue to pe-rate at roughly full inflation."
- Yellen adds that there is, "no evidence that inflation is becoming ingrained or that there is a wage price spiral."
NOK: Sharp Drop In Crude and USD Rally Feeds Through To NOK
Dec-12 14:57
The sharp fall in crude prices noted earlier has fed through into the oil-sensitive NOK, with EURNOK and USDNOK around 0.5% higher on the day.
- Less dovish Fed pricing and a strong USD aided bearish crude momentum, with the latter also pressuring the risk-sensitive NOK.
- Most analysts expect the Norges Bank to hold rates on Thursday, which may shield NOK from further weakness if rates were not raised, unless the decision was accompanied by overtly dovish guidance. A 25bps hike (still certainly on the cards) may provide some respite for the NOK.
- The move sees EURNOK break through the December 6 high of 11.8424 (currently trading at 11.8607), with the Nov 17 high of 11.8790 the next target before 11.90.
- NOKSEK sits 0.4% lower at 0.9540, with the May 3 low of 0.9498 the first support and bear trigger.
- Our Norges Bank preview, released earlier today, can be found here.
