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Volatility, China GDP, ECB to Test Dollar and Equity Strength

Volatility, China GDP, ECB to Test Dollar and Equity Strength

Talking Points:

  • Official measures of volatility remain suspiciously deflated as key themes heat up and FX price swings increase
  • Extreme speculative futures exposure in the Russell 2000, US yields, VIX, Yen and Oil generate asymmetry
  • Top event risk ahead includes: the UK PM talking Brexit priorities, ECB decision, China GDP, US Presidential inauguration

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We are heading into the third week of the new trading year, and cracks are starting to appear in the market's veneer of serene optimism. Headlines for the bullish crowd are still championed by the 'will they or won't they' speculation surrounding the Dow Jones Industrial Average's intentions for 20,000. Just breaking the round number seems to be the only objective in mind, not what kind of motivation would follow its breech. That is not encouraging. Meanwhile, a stalled advance for risk-sensitive assets and the slow retreat of the Dollar takes a different score than financial media's headlines. FX volatility often precedes greater activity in other asset classes. And that bodes poorly for paragons of complacency like the global equities and other assets with the Dollar, Yen crosses and emerging market currencies picking up steam.

Whether sentiment improves or deteriorates, accelerates or decelerates matters little without the context of speculative assumption and exposure. Coming out of the holiday period at the turn of the year, we find exposure at extremes on a number of fronts. Net speculative futures positioning for both the Russell 2000 and 10-year Treasury note - an obvious trader favorite and distorted one respectively - are standing just off extraordinarily inflated records. In Yen futures, the rapid swing to a net short (long crosses) view is now starting to turn along with USD/JPY. Even the rank behind oil finds itself bloated just below a record long holding despite the commodity 50 percent lower than where it last stood when it reached the extreme previously. Arguably the most disconcerting exposure rests with VIX which is a thematic leverage on complacency. Despite the index holding at its natural low, futures traders are holding near record level short exposure.

Nothing breaks an ill-fated calm quiet like high profile event risk that triggers deeply seated themes. As it happens, we have quiet a lot of that in the week ahead. Taking the event risk chronologically, Brexit watchers will have a tangible updated from Prime Minister Theresa May scheduled to discuss the government's priorities with negotiating the UK's position after Article 50 is invoked. Cutting through events like the US CPI, Aussie jobs and BoC policy meeting; the ECB's policy decision Thursday will offer anchor for skepticism over the world's most overdrawn stimulus effort. Chinese 4Q GDP is parhaps the most recognizable single event but the US Presidential inauguration should also remind us of the expectations built into US growth and policy moving forward. We talk about all of this in this weekend's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.