NOK: EURNOK Implied Vols Bid With Tomorrow's Decision A Close Call
Sep-17 11:07
At the start of the month, analyst and market expectations were fairly comfortably in favour of a 25bp Norges Bank cut tomorrow. However, domestic data released over the past two weeks have made the decision a much closer call. We currently lean against consensus in favour of a hold at 4.25%, but there remain good arguments for a cut.
- MNI’s full Norges Bank preview is here
- The close call nature of the decision opens the door to a material knee-jerk market reaction under any rate scenario. The persistence of such a reaction will depend on the September MPR rate path.
- The rate path is expected to be revised higher, implying a more hawkish terminal rate landing zone, but estimates of the revision magnitude vary.
- EURNOK ATM implies vols are nonetheless at the highest level since June, meaning an ATM straddle expiring at tomorrow’s NY cut requires a ~55 pip swing in either direction to breakeven (Bloomberg Finance L.P data).
- EURNOK is currently up 0.3% today at ~11.6280, with equities and brent crude futures softening. A hawkish Norges Bank decision, which features a rate hold and material upward rate path revision would expose the Sep 15 low at 11.5387 on the downside. This support aligns closely with the 76.4% retracement of the June – August rally at 11.5416.
- On the other hand, a rate cut would place resistance at the 20-day EMA of 11.7003 into view.
- Recent sell side views on NOK (and EURNOK specifically) are mixed: A few weeks ago, Danske Bank initiated a EURNOK long trade with a soft target of 12.10, while Nordea this morning believe that “the bottom is close and that EURNOK will eventually turn upwards and will reach 11.75 by the end of the year”. On the other hand, JP Morgan’s “conviction in the bullish NOK view is increasing for reasons relating to monetary and fiscal policy themes, as well as growth and valuation dynamics”. They target EURNOK at 11.20 in Q4 and 10.70 in a year’s time.
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Historical bullets
US 10YR FUTURE TECHS: (U5) Trend Outlook Remains Intact
Aug-18 11:03
- RES 4: 113-23 76.4% retracement of the Sep’24 - Jan’25 sell-off
- RES 3: 113-07 76.4% retracement of the Apr 7 - 11 sell-off
- RES 2: 112-23 High May 1
- RES 1: 112-15+ High Aug 5
- PRICE: 111-25+ @ 11:52 BST Aug 18
- SUP 1: 111-10+ 50-day EMA
- SUP 2: 110-23+/08+ Low Aug 1 / Low Jul 15 & 16
- SUP 3: 110-03 76.4% retracement of the May 22 - Jul 1 bull leg
- SUP 4: 109-28 Low Jun 6 and 11
The underlying bullish theme in Treasury futures remains intact, supported by the recent clearance of the bull trigger at 112-12+, the Jul 1 high. A resumption of gains would open 112-23, the May 1 high and the next important resistance. Above 112-23, retracement levels are layered between 113-07 and 113-23. On the downside, key support is 110-08+, the low on Jul 15 and 16. First important support lies at 110-23+, the Aug 1 low.
US TSYS: J.P.Morgan Recommend Tactical Short Hedge In 3s
Aug-18 10:58
Late on Friday J.P.Morgan recommended a tactical short hedge in 3s to “protect the profits” in their 5s/20s steepener, suggesting that “5s/20s currently appears about 5bp steep adjusted for the level of 3-Year yields”.
- They “have a hard time seeing the case for a deep (Fed) easing cycle. It’s clear that the economy is slowing, but its resilience remains evident”…“Resilience is also being supported by easy financial conditions, as the Fed's Financial Conditions Impulse on Growth index indicates they are a modest tailwind for growth right now”.
- J.P.Morgan go on to flag that “recession risks have declined. Thus, despite an expectation of a more diffuse set of opinions on the FOMC over time, we think it will be challenging to price a more aggressive path for Fed easing unless the labor market loosens decisively from here, given that progress toward 2% core inflation has stalled”.
- As a result, they think “near-term risks skew toward some mean reversion higher in front-end yields over the near term. The biggest risk to this view stems from Chair Powell, as he is slated to speak on the economic outlook at the Jackson Hole Symposium Friday morning. However, with still one more employment and inflation reading ahead of the September FOMC meeting, we do not think the Chair will necessarily pre-commit to or ratify expectations of a cut next month”.
US TSYS: Mild Firmer Ahead Of Trump, Zelenskyy and EU Leader Meetings
Aug-18 10:52
- Treasuries are mildly firmer ahead of today’s geopol-focused session with Oval Office meetings with Trump, Zelenskyy and EU leaders.
- It’s a quiet docket otherwise although a recently notably dovish Bowman is also set to speak on Bloomberg TV.
- Cash yields are 1-2bp lower on the day, paring some of Friday’s slow-to-build post-data losses.
- 5s30s sits at 108bps having on Friday pushed to a fresh ytd high of 109.4bp.
- TYU5 trades at 111-25 (+05+) to help the late Friday lift off lows of 111-17+, amidst light cumulative volumes of 230k.
- Resistance is seen at 112-15+ (Aug 5 high), having come close with 112-14 before Thursday's PPI report, whilst support is seen at 110-19+ (Jul 24 low).
- Data: NY Fed services Aug (0830ET), NAHB index Aug (1000ET)
- Fedspeak: Bowman on Bloomberg TV (1245ET) – see STIR bullet
- Bill issuance: US Tsy $82B 13W & $73B 26W bill auctions (1130ET)
- Politics (timing as per politico): Trump and Zelenskyy only at 1315ET before Trump, Zelenskyy and EU leaders at 1500ET.
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