FxWirePro: Macro FX Themes Ahead of Major Monetary Policies and Trade Recommendations

This week, major central banks (Fed, BoJ and BoE) are centre of attraction as they are scheduled for respective monetary policies, on Wednesday, the Federal Open Market Committee will meet for the final time in 2018, the Fed is forecasted to hike by another 25bps on Wednesday at the conclusion of the two-day FOMC meeting. Here is a summary of core expectations and risks:

Fed funds target range: Many analysts and banks also expect a 25bps hike in the fed funds target range that would take the upper bound to 2.25%. Markets are still not fully priced for a hike, leaving open the chance of a dovish surprise. The minutes to the November 7th – 8th meeting indicated a rate hike would be appropriate “fairly soon” which is in keeping with the guidance toward a near-term hike that the Fed has previously employed.

Bank of Japan (Thursday): With inflation, likely under renewed downward pressure and core inflation well below target, there is no rush to signal much of anything at this meeting — let alone alter policy variables. The policy rate should remain at -0.1%, the 10-year yield target should remain ‘around 0%’ and asset purchase parameters should remain unchanged. Related to the decision is that Japanese CPI inflation for November (Thursday) is likely to track energy prices lower, much like elsewhere. Headline inflation is expected to drop back below 1% y/y with core inflation excluding fresh food holding steady around 1% and only at about half of the BoJ’s goal.

Bank of England: The Bank of England’s MPC will publish its final rate decision of 2018 on Thursday at midday. Bank Rate is expected to stay at 0.75%, but the accompanying MPC minutes are set to give an indication of how the Committee has evolved its outlook in response to a number of developments since the November Inflation Report (IR).

The last FX Markets Weekly outlook of this year reviews these significant developments and concludes that the key pillars for our 2019 Global FX Strategy outlook remain: 

1) US exceptionalism is fading, but 

2) this will drive end-of-cycle anxiety that hangs over high-beta FX rather than broad-dollar weakness, 

3) while only some developed market currencies with resilient enough outlooks and normalizing central banks will be able to strengthen versus the dollar.

In the near term, the rally in US rates, deferment of the earlier planned 1-Jan US-China tariff hikes, and renewed focus on downside US fiscal risks make us more tactically cautious the dollar vs reserve FX, heading into the turn of the year.

Strategic FX derivatives recommendations: This week, we advise to square off any long positions in USDJPY at a 0.56% decent profit. Alternatively, at spot reference of USDJPY: 112.573 levels, we advocate buying a 2M/2w 113.723/110.00 put spread ahead of Fed and BoJ monetary policies (vols 6.68 vs 5.68 choice), wherein short leg is likely to function if the underlying spot FX keeps spiking, we would like to maintain the ITM long leg with the diagonal tenors on hedging grounds.

At spot reference of GBPJPY: 143.360 levels, we advocate constructing tunnel spread on daily trading grounds, using upper strikes at 143.9360 and lower strikes at 142.815 levels. The strategy is likely to fetch leveraged yields as long as the underlying price keeps dipping but remains above lower strikes on the expiration. 

Capitalizing on any minor upswings, we advocate shorting2w GBPJPY (1%) OTM put option (position seems good even if the underlying spot goes either sideways or spikes mildly), simultaneously, go long in 2 lots of delta long in 2m ATM -0.49 delta put options.

Currency Strength Index: FxWirePro's hourly JPY spot index is flashing at 112 levels (which is bullish), while hourly USD spot index was at -62 (bearish) and GBP is at -56 (bearish), while articulating at (09:52 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex