Danske Research Team
Danske Bank A/S
Today there is little to trade on for the FX market. The Fed speeches will be scrutinised to get more insight into Fed thinking but EUR/USD seems stuck in a very tight range today.
The US warned Russia over any Russian efforts at destabilising Ukraine, saying it would incur costs. Rebels occupying overnment buildings in Donetsk declared a ‘people’s republic’ on Monday and called for a referendum on secession from Ukraine to be held on 11 May. The fear is that Russia would annex further parts of Ukraine on the back of a referendum as was the case with Crimea. The Russian markets were under some pressure yesterday on the back of the renewed tensions and we see an significant risk of a further sell-off in the rouble in the coming days – particularly if violence in were to escalate further.
Both EUR/HUF and EUR/PLN implied volatility look cheap when evaluated by a z-score of differences between implied and realized volatility (see page 3). 3M EUR/PLN atm implied volatility trades at 5.56% - very close to the lowest levels seen on 15 January at 5.4975%. We still prefer to hedge an escalation of geo-political tensions and the risk negative sentiment spreading to the rest of the EMEA region via a bought 3M EUR/PLN call option. This trade also looks attractive in the light of the interest rate meeting tomorrow in the Polish National Bank (NBP). We expect the NBP to keep its policy unchanged but we see a high probability that the central bank will strike a dovish tone.
As widely expected Bank of Japan left its monetary policy unchanged this morning. The outcome was as expected and the effect on the JPY has been relatively modest. There was no major changes in the statement compared with the previous meeting in March and no hint of an imminent easing move. The strongest argument for an imminent easing move is that the Japanese economy has been weaker than expected ahead of the consumption tax hike in April. However, at the moment it does not appear to be a big concern for BoJ. We still look for a higher USD/JPY in Q2. Remember, BoJ has a new opportunity to ease monetary policy in just three weeks. The next BoJ meeting is on 30 April.
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