Trading considerations and volatility reads mentioned in the video
Skew, positioning and rate expectations
It was a fairly upbeat end to the Asia trading week, where the clear talking point on the floor today has been around the October RBA meeting. The RBA flagged a cut in the September minutes, but we can add in yesterday's soft employment data and a failure from the private sector to really respond to either the Morrison fiscal stimulus or prior rate cuts, although that is early days.
The view on an October rate cut has become mainstream, not just among economists, but the rates market has gone some way pricing a cut above 80%. NAB and Citigroup moving their base-case today for an October cut has resonated, with Aussie 3-year Treasury's -3bp, in turn, it has taken the AUDUSD through 0.6800 and we could be staring at a re-test of the August lows. It has also pushed the ASX 200 0.6% higher and the index looks strong here.
Small gains has been seen in the Nikkei 225 and Hang Seng, while we are seeing buyers in crude. In FX, USDCNH is flat on the session, although the preference is to trade this pair from the short-side despite the PBOC cutting its prime rate across multiple maturities. Where, this shows a commitment to massage funding costs and keep economics supported - the mainland Chinese indices are up 0.2% or so.
Central bank divergence is growing
It's been a big week for markets, even if implied vols have declined and the message I am getting is that we are getting closer to the lower limits on rates, certainly in the US and Europe. Of course, the Fed can, and will likely go lower, but the push onto fiscal policy is growing by the week. That makes Australia so interesting, because not only are the public failing to really respond to rate cuts, although prior cuts still need to fully filter through, but consumers are failing to respond to tax cuts. One could argue the economy needs a quick, hard smack and that could be a 50bp cut and a message of future QE.
In the video I explore these themes, but I look at the week that will be. What could be the drivers, pricing on interest rates, while taking a real look at implied volatility to gain a sense of how the market sees the week ahead. Take a look.
