The holiday season is in full swing and for some this may mean that markets will settle down as liquidity dries up in the coming weeks.
Our evidence suggests that FX vol tends to go up in August, however, and data releases and events can trigger renewed spikes of short-end vol across G10.
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It remains to be seen whether the combined effect of the multitude of idiosyncratic shocks will be sufficient to fuel a broader risk off move. Even so, we have added to our portfolio a long XAU/CHF trade as a risk-off hedge. Another interesting strategy is to identify cheap FX volatility to benefit from accentuated market moves on the back of event risks and thin market liquidity ahead.
Next week’s data calendar is laden with data releases like US non-farm payrolls, and events like the BoE Inflation report and the RBA policy meeting.
The BoE inflation report may struggle to exceed the dovish market expectations ahead of the August inflation report and that could help GBP consolidate more broadly. We remain long GBP/CHF* going into the release. Investors are looking for another solid US payroll and earnings data.
JPY should remain in the spotlight ahead of the announcement of Abe’ fiscal stimulus next week. We expect Japanese stocks to recover some more as a result and that should help USD/JPY stabilize.
Ahead of the RBA, markets see a greater than 50% chance of a rate cut. We also see a non-negligible risk of policy action and stick to our tactical AUD/USD short. The FX options markets do not seem to be pricing in a significant scope for spot moves making AUD short-term gamma an interesting buy as well. That said, we remain bulls on AUD/NZD over the longer-term, and expect the upcoming NZ unemployment and inflation expectations data to fuel rate cut expectations ahead of the August RBNZ meeting, and keep the cross supported. Potential disappointments from Chinese PMI data could keep both antipodean currencies under pressure against USD.