We've had some considerable volatility over the past session - particularly from the Aussie dollar pairs. With equities holding to ranges and the dollar not making a proactive move, it was up to scheduled event risk in the thin docket to draw our attention. Of course the biggest mover on the day was the Aussie dollar in response to the better-than-expected CPI report. After the release, the currency rallied against all of its counterparts.
An eventual rebound in yield forecasts can serve the Aussie dollar exceptionally well. One of my favorite trades is AUDNZD long through 2014, but that will take time to develop - and this is unlikely that signal. GBPAUD and EURAUD also look good should the RBA start considering rate hikes, but that is not necessarily the case with this one data print. I'll need to wait for these (though a pound or euro drop could make the latter two immediate trade opportunities).
I like AUDUSD for the technicals and timing for the fundamentals. I took a short on this bounce from 0.8860 with a stop 100 pips higher. While the inflation report helps the Aussie, it doesn't single handedly put the RBA on rate hike watch - nor speculation for the imminent move. Meanwhile, the Taper speculation is building and this pair has a bearish bias should there be any risk aversion swells (and a low correlation to the 'risk on' bearing as we've seen over the past three months).This looks like a good pullback in a larger trend as long as conditions remain steady or risk aversion kicks in.
A similar event-driven volatiltiy threat lies ahead for the sterling. There is a lot of rate hike speculation build into the pound, and it has driven the currency to considerable heights. Should the labor data and/or BoE minutes alter those expectations (for better or worse), the result could be quite volatility.
In the event of a dovish outcome, I like GBPUSD breaking its H&S neckline around 1.6300 and then 1.6250. GBPAUD can extend a run below 1.8550 with the newly invigorated Aussie dollar. And, EURGBP has a spring board in that large channel floor above 0.8200. That said, knowing this event risk is a very real volatility threat, it is important to exit the trade I had as it presents too much risk. I will reenter when conditions are clear.
For the alternative outcome - robust data that supports speculation of a rate hike - the 'undervalued' pound-based pairs are fewer. EURGBP has the technical appeal with a 0.8200 break and the euro's appeal is lackluster against an active rate hike candidate should the sterling win that prestige. GBPJPY may be another option as it has the steady BoJ stimulus implications, but it is materially less appealing.
Outside of these volatility plays, I am still long EURNZD from 1.6300 (and a 100-pip stop), but the recovery effort following the NZD swell after the CPI report is proving slow going. I still like the technical view with the channel floor, but the fundamentals are simply drifting.
Sign up for John’s email distribution list, here.
