CURRENCY VOLATILITY – TALKING POINTS
- USD/JPY, AUD/USD, EUR/CAD 1-week implied volatility measures skyrocket
- A barrage of economic data releases looks dictate global risk appetite next week
- Swelling downside risks to global economic growth threatens to deteriorate market sentiment further
- Learn how to take advantage of market-moving events with this free educational guide on Forex News Trading
Currency market volatility appears set to continue creeping higher as forex traders digest the latest jolt of uncertainty from Trump Tariffs on Mexico and global growth risks lurking on the horizon. A slew of economic indicators and events scheduled next week will likely provide traders with a health check on the global economy which should determine risk appetite and price action across forex, commodity and capital markets.
USD/JPY, AUD/USD, EUR/CAD VOLATILITY AND TRADING RANGES (OPTIONS IMPLIED)
USD/JPY, AUD/USD and EUR/CAD may be of particular interest to keep an eye on next week considering the central bank rate decisions, several PMI data prints and employment numbers that loom. In fact, implied volatility measures for the currency pairs listed above have soared to multi-week highs as forex options traders gear up for next week’s chalk-full economic calendar.
FOREX ECONOMIC CALENDAR – USD/JPY, AUD/USD, EUR/CAD
Although not pictured above, manufacturing indicators from Australia and China could easily set the tone for sentiment next week which are due for release 22:30 GMT Sunday and 1:45 GMT Monday, respectively. The escalation in US China trade tension appears to have already weighed negatively on the Chinese economy after its state-run economic agency reported a contraction in its manufacturing industry on May 31.
The market’s preferred private-sector reading from Markit economics this coming Monday looks to echo the Chinese manufacturing downturn which could provide another blow to risk assets if the data is materially worse than what was initially reported by China. Weakening economic activity in China will likely spill over to neighboring Australia seeing that the country is heavily dependent on import demand from China (who comprises roughly 30 percent of Aussie exports). As such, the Australian Dollar could be at risk of reversing lower early next week in response to these PMI data points while the anti-risk driven Japanese Yen may continue its recent ascent.
AUD/USD PRICE CHART: DAILY TIME FRAME (DECEMBER 17, 2018 TO MAY 31, 2019)
Aussie price action will be primarily dictated by the Reserve Bank of Australia’s (RBA) interest rate decision, however, which is scheduled for release Tuesday at 4:30 GMT. Overnight swaps are now pricing a 95.3 percent probability that the RBA lowers its policy interest rate. The near-certain rate cut bets compares to a 23.8 percent probability priced in earlier this month.
If an RBA rate cut materializes next week, AUD/USD will likely test technical support at the 76.4 percent Fibonacci retracement level and the lower bound of the 1-standard deviation option implied trading range. Moreover, the Australian Dollar could oscillate further in response to Q1 GDP data due Wednesday at 1:30 GMT. An upbeat report has potential to provide a bit of buoyance to AUD crosses whereas a bleak GDP report could exacerbate Aussie weakness and reiterate the bearish downtrend in AUD/USD.
USD/JPY PRICE CHART: DAILY TIME FRAME (DECEMBER 18, 2018 TO MAY 31, 2019)
As mentioned previously, the sentiment-driven Japanese Yen could continue to gain ground against its counterparts if appetite for risk fails to recover next week. USD/JPY has swooned over the last month with currency traders fleeing risk and racing to unwind JPY-funded carry trades, spurring demand for the Yen in turn. If the upcoming US manufacturing and services PMI data disappoints, calls for the Fed to cut rates this year will likely grow louder which would hinder US Dollar upside.
Additionally, from Fed Chair Jerome Powell on Wednesday looks to move the tape in stocks and the USD with the head central banker providing updated commentary on the FOMC’s view on easing monetary policy. Rate traders are already pricing over a 90 percent probability that the Fed slashes rates by 25 bps by the end of the year according to overnight swaps. Although, Friday’s employment data could reverberate a robust labor market which has served as the cornerstone of strength in the US economy and could boost the greenback.
USD/JPY bulls will likely aim to cling onto support near the 50 percent Fibonacci retracement line drawn from the year-to-date high and low next week. Rebounding market sentiment could push the currency pair bouncing back towards resistance posed by the 38.2 percent Fib, but USD/JPY bears may overwhelm potential upside if risk trends continue to escalate which could set the 108.00 handle in traders’ crosshairs.
EUR/CAD PRICE CHART: DAILY TIME FRAME (DECEMBER 19, 2018 TO MAY 31, 2019)
In the aftermath of the EU Parliamentary elections and the Bank of Canada (BoC) rate decisionthis past week, EUR/CAD traders shift focus to upcoming Canadian PMI and employment numbers in addition to Eurozone inflation data and the ECB meeting. Overarching weakness in the Euro and Canadian Dollar has positioned EUR/CAD in a relatively tight trading range since mid-January.
Yet, a symmetrical triangle appears to have emerged from a series of lower highs and higher lows and could keep EUR/CAD rangebound over the short-term. Nevertheless, the threat of increased dovishness from the ECB next week could drag EUR/CAD lower. That being said, recent crude oil price carnage has served as a major headwind to the loonie which may linger amid deteriorating global growth prospects.
– Written by Rich Dvorak, Junior Analyst for DailyFX
– Follow @RichDvorakFX on Twitter