Volatility set to increase, CBR likely on hold

Forex News and Events

CBR to hold rates until 2017 (by Yann Quelenn)

At its October meeting tomorrow, the Central Bank of Russia is likely to keep its rate unchanged. The path towards a rate normalization is taking time. The oil price rally since the start of this year is clearly not enough to trigger a sustainable Russian recovery. Russia has clearly deeper underlying economic difficulties. In addition, the black commodity is currently stalling below $50 a barrel and we can already distinguish that downside pressures on oil prices are growing as global oversupply threats remain far from over.

In terms of data, Russian inflation is still running at a strong pace, 6.4% y/y. The consequence of this is that disposable income is collapsing. This is why we believe that there is not much the CBR can do at the moment as lowering further interest rates in the short-term would clearly create pressures on the middle class even if Prime Minister Dmitry Medvedev nonetheless recently indicated that interest rates could be reduced in the short-term. We believe that this was only a verbal intervention.

However, we believe that an inflation below 6%, which should happen early 2017, will push the central bank to act in order to lighten the weight on the ruble. At the moment, containing inflation by proposing massive interest rates is boosting the demand for the currency. Against the dollar, the ruble has been strengthening since the beginning of this year even though USDRUB is fading around 62 ruble for one single dollar note. We continue to believe that the CBR will remain on hold until the end of this year as it awaits new data in order to reduce the inflation pressures on the Russian population.

The CBR is therefore playing a very tight game as it tries to lower demand for the ruble without negatively impacting consumer activity, already largely affected from such monetary policy, as a result of strong inflation. We maintain our bullish view on the ruble until the end of the year.

Volatility to pick-up in medium-term (by Arnaud Masset)

Volatility, both in the equity and the foreign exchange market, has been very low recently, thanks to a busy year on the political front and hyperactive central banks. Indeed, financial markets have spent most of the year waiting on key decisions from the Brexit vote to the endlessly delayed interest rate hike from the Federal Reserve. After “spiking” at 8.66% in mid-October, one-month implied volatility on EUR/USD quickly returned towards the 7% threshold as it appeared increasingly likely to be a done deal for Hillary Clinton. For longer maturities, implied volatility has been desperately stuck between 8% and 9% for several months. We do not expect any improvement on this side before the December FOMC.

On the equities front, the broader picture is not very encouraging. The VIX spent most of October at around 15% and started to slightly pick up recently amid mounting uncertainty regarding further equity gains in the US. Similarly, the Euro Stoxx 50 volatility index has been moving well below its 3-month moving average, currently trading at around 19%. All in all, in light of upcoming events - both on the political and central bank fronts - volatility should continue to rise; it is therefore time to take long volatility positions.

USD/JPY - Monitoring 105.00.

 

Today's Key Issues	Country/GMT
oct..27 Deposit Rates, exp 0,50%, last 0,50%	NOK/08:00
Sep M3 Money Supply YoY, exp 5,10%, last 5,10%	EUR/08:00
Oct Consumer Confidence Index, exp 108,6, last 108,7, rev 108,7	EUR/08:00
Oct Manufacturing Confidence, exp 102,2, last 101,9	EUR/08:00
Oct Economic Sentiment, last 101	EUR/08:00
Sep Foreign Tourist Arrivals YoY, last -38,00%	TRY/08:00
Visco, Padoan Speak at World Saving Day Event in Rome	EUR/08:15
Norges Bank Holds Rate Decision Press Conference	NOK/08:30
3Q A GDP QoQ, exp 0,30%, last 0,70%	GBP/08:30
3Q A GDP YoY, exp 2,10%, last 2,10%	GBP/08:30
Aug Index of Services MoM, exp 0,10%, last 0,40%	GBP/08:30
Aug Index of Services 3M/3M, exp 0,80%, last 0,60%	GBP/08:30
Sep Hourly Wages MoM, last 0,00%	EUR/09:00
Sep Hourly Wages YoY, last 0,60%	EUR/09:00
Sep PPI MoM, exp 0,20%, last -0,10%	ZAR/09:30
Sep PPI YoY, exp 7,10%, last 7,20%	ZAR/09:30
Oct CBI Retailing Reported Sales, exp -2, last -8	GBP/10:00
Oct CBI Total Dist. Reported Sales, last 17	GBP/10:00
Sep National Unemployment Rate, exp 11,90%, last 11,80%	BRL/11:00
oct..21 Foreigners Net Stock Invest, last $17m	TRY/11:30
oct..21 Foreigners Net Bond Invest, last -$311m	TRY/11:30
Aug House Price Index YoY, last 13,98%	TRY/11:30
Aug House Price Index MoM, last 1,65%	TRY/11:30
Sep Tax Collections, exp 95014m, last 91808m	BRL/12:00
Austrian Central Banker Ewald Nowotny Speaks in Cyprus	EUR/12:00
Sep P Durable Goods Orders, exp 0,00%, last 0,10%	USD/12:30
Sep P Durables Ex Transportation, exp 0,20%, last -0,20%	USD/12:30
Sep P Cap Goods Orders Nondef Ex Air, exp -0,10%, last 0,90%	USD/12:30
Sep P Cap Goods Ship Nondef Ex Air, exp 0,30%, last -0,10%	USD/12:30
oct..22 Initial Jobless Claims, exp 255k, last 260k	USD/12:30
oct..15 Continuing Claims, exp 2052k, last 2057k	USD/12:30
oct..21 Gold and Forex Reserve, last 391.4b	RUB/13:00
Austrian Central Bank Governor Ewald Nowotny Speaks in Cyprus	EUR/13:00
oct..23 Bloomberg Consumer Comfort, last 41,3	USD/13:45
Sep Pending Home Sales MoM, exp 1,00%, last -2,40%	USD/14:00
Sep Pending Home Sales NSA YoY, exp 4,00%, last 4,00%	USD/14:00
Oct Kansas City Fed Manf. Activity, exp 3, last 6	USD/15:00
Sep Central Govt Budget Balance, exp -23.6b, last -20.3b	BRL/16:30
ECB's Mersch Speaks in Hachenburg, Germany	EUR/17:00
SSM Board Member Dombret Speaks in Sao Paulo	EUR/21:30

 

The Risk Today

Yann Quelenn

EUR/USD's bearish momentum is definitely up and running. Strong resistance lies at 1.1058 (13/10/2016 high). Key resistance is located far away at 1.1352 (18/08/2016 high). Expected to further weaken towards support area below 1.0860. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.

GBP/USD keeps on trading around 1.2200. However, the momentum seems still negative. Hourly support is given at 1.2083 (25/10/2016 low) while hourly resistance lies at 1.2329 (11/10/2016 high). Key resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to show further weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY is trading mixed but the pair remains within an uptrend channel. A break of hourly support at 102.81 (10/10/2016 low) is unlikely at the moment. Key support can be found at 100.09 (27/09/2016). Hourly resistance is implied by the upper bound of the uptrend channel around 105. Expected to see further bounce within uptrend channel. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79(13/06/2013 low).

USD/CHF's momentum tend to fade. The pair still lies within former resistance area between 0.9919 (07/08/2016 low) and 0.9950 (27/07/2016). However, the momentum remains bullish since September 15. Hourly support is located at 0.9733 (05/10/2016 base) then 0.9632 (26/08/2016 base low). Expected to see continued increase. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

 

Resistance and Support:

EURUSD	GBPUSD	USDCHF	USDJPY
1.1428	1.3121	1.0328	113.8
1.1352	1.2857	1.0257	111.45
1.1058	1.2477	1.0093	107.49
1.0911	1.2218	0.9934	104.56
1.0822	1.209	0.9632	102.8
1.0711	1.1841	0.9522	100.09
1.0458	1.052	0.9444	99.02