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The general perception is that FX markets have seen a higher number of extreme events in 2015-2016. This includes an unusual number of flash crashes such as in October when GBPUSD collapsed by 6% in the space of a few minutes.
Such events are no longer exceptional given that the past two years has seen the Treasury flash crash, the CHF depeg, the Brexit vote, the Trump election and a number of central bank meetings that triggered tremendous intraday volatility.
UK PMI made a strong gain in December but other data were more mixed. The December PMIs were solid across the board. After some signs of cooling, the manufacturing PMI pointed to a pickup in activity with a strong gain in the overall index from 53.6 to 56.1.
The Markit/CIPS UK Services PMI rose to 56.2 in December of 2016 from 55.2 in November, beating market expectations of 54.7. It is the highest value since July of 2015, boosted by stronger rises in new work. In addition, employment continued to increase, cost pressures remained elevated and business expectations strengthened.
On the flip side, sterling appears to be under deep pressure this morning owing to PM May’s comments, GBP is clouded by the risk of re-focus around a “harder” exit from Europe. In an interview yesterday, PM Theresa May emphasized that the UK will be leaving the EU and will not be keeping ‘bits of membership’. This would mean negotiating the ‘best possible deal’ to access the Single Market, although controlling immigration and ending European Court of Justice Jurisdiction are red lines for the UK government.
Trade tips:
Buy GBPUSD 6m Double No Touch 1.19/1.30 indicative offer: 13% (spot ref: 1.2160) Trade risks: Limited to the premium. Investors buying a Double No Touch cannot lose more than the premium initially invested. However, the option will be canceled if the GBPUSD hits 1.19 or 1.30 at any time before the 6m expiry.
Initiate long EURGBP 1y volatility swap against GBPUSD 1y volatility swap Flat spread (indicative, GBP notional for both contracts) Trade risks: cable volatility outperforming EURGBP over 2017. The trade is exposed to the volatility differential between the GBPUSD and EURGBP. Please be mindful that a fall in EURGBP volatility and/or a rise in GBPUSD volatility would induce losses.
