Thursday, 6 February 2014



The two main headlines to cross the wires at 12:45GMT today. While not a surprise at all, the market reaction was a little mixed. A quick EUR bid, before turning lower ahead of the press conference.

EUR tick

In this time, the DAX had a bit of fun, flash crashing 2% on the front month Futures contract as shown below, while also taking about 30 points from the EURUSD
DAX futures

Then came the Press conference with Draghi, while honestly there is not much new added, it did have a mildly hawkish sense to it. On this, unsurprisingly EUR rate markets where quite active with 1y1y EONIA forwards trading up a couple of basis points. EUR 1 swaps traded fro about 11 down to 3 at one point, cutting the implied yield from 8bps to 4bps, as seen here. The improved EUR rates pushed down the yield differential and pushed up the EUR spot price.

EUR 1 year implied yield (USD - EUR rate)

It has been relatively boring since the press conference, trading very flat around 1.36 EURUSD and 138.5 EURJPY

And as we can see, the EUR lagged the rates post ECB rate decision, as such it was not that much surprise to see a firm bid under the EURUSD, but after the headlines the modelled Rates to EURUSD tracked perfectly. (model based on rate differentials and volatility skews).

EUR vs rate model and spread in bottom pane

BUT, as we can see from the ECB nominal liquidity action is almost certainly needed to avoid short term money market rates from spiking higher, and so there is still potential for the ECB to act in some way or another and remain on a dovish path.

ECB nominal Liquidity

Now looking forward, tomorrow we have the NFP, arguably the most important scheduled data release, and so it is good to see what the market expects of this. What we can see is an expected print of 182-185 based on the median/mean for the Reuters poll.

NFP poll
Some select names see NFP coming in at - 

Barclays - 175K
BNP Paribas - 185K
commerzbank - 200K
Credit suisse - 195K
Deutsche Bank - 200K
Goldman - 200K
Morgan Stanley - 215K
Nordea - 150K
Soc Gen - 290K

What we can see from the options markets currently is the O/N Implied vol in the USDJPY is currently Mid around 19.6, with EURUSD mid around 12.

Pricing this up, as it stands now the Market breakevens at spot +/- 82 pips for USDJPY as seen here.

USDJPY ATM straddle B/E

This means that the market sees about 101 to the downside on a "miss" and about 102.60 on the upside with a strong beat in NFPs

Some other FX ATM breakevens 

AUDUSD - 80 pips (spot 0.8975)
EURUSD - 76 pips (spot 1.3600
USDTRY - 210 pips (spot 2.2070)

So there is definitely some decent expectation going into tomorrow, but as we seen with recent US data, the weather has played a key part in recent data pieces and the Jan NFP will likely be no exception. But bear in mind, given the last NFP reading and subsequent FOMC action, it would appear a major (negative) print would be required for any serious "taper-off" talks.

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