July 4 2017

July 3, 2017 (Commerzbank AG) – FX options market in the doldrums

The FX options market is experiencing the summer doldrums even though EUR/USD has moved sharply upwards in recent days. Exchange rate options are trading on the basis of their lowest implied volatility since 2014. In our view, FX volatility will only show any sustained pickup once inflation expectations rise and central bank monetary policy switches away from its current passive setting.

Falling oil prices: OPEC’s strategy put to the test

Oil is now as cheap as it was before production cuts started in November 2016. Prices could fall even more in the short term if the markets decide to test the resolve of OPEC and the US shale oil industry. But with demand in Q3 likely to exceed supply, prices should pick up again. We maintain our year-end Brent forecast of $48 per barrel

Outlook for the week of 3 to 7 July 2017

  • Economic data: US employment in June looks set to have risen visibly after the May calendar effects unwind, although payroll gains are likely to slow due to demographic reasons over the medium-term.
  • Bond market: Markets are likely to remain jumpy following the latest volatility tantrum in euro benchmark rates and a raft of big US data releases. We believe 10y Bund yields will test the upper boundary of a sideways range centred on 0.5% with risks skewed for a break to the upside
  • FX market: The euro is gaining sharply in the wake of an unintentionally hawkish speech by ECB President Mario Draghi. But the EUR-USD exchange rate is also supported by a Fed which appears to have recently become rather cautious.
  • Equity market: Germany should see ongoing M&A activity in the coming months, supported in part by the positive equity market trend.
  • Commodity market: With US output rising again, oil prices seem set to fall next week. Gold could show further weakness next week and weak US car sales may trigger the price correction we are expecting for palladium.


July 4, 2017 (Howard Friend, Portfolio Manager ATFX Europe) – The recent decline in the value of the US dollar must have come as a bit of shock to most market participants as it flew in the face of the conventional wisdom which has prevailed since the financial crisis of 2008.

In the aftermath of the crisis the US dollar suddenly found favour as bout of `safe haven` buying effectively put a floor in place under the market with subsequent attempts to break lower in 2009, 2010 and 2011 all being met by very strong demand around this price level.

A period of stability then ensued culminating in the low volatility environment witnessed between 2012 and early 2014 which was followed by a powerful advance starting in H2 2014 which skewed market psychology firmly in favour of the US dollar bull camp which is broadly where we stand today. Here is a chart of the Trade Weighted USD courtesy of the Board of Governors of the Federal Reserve System.

Being a long-time observer of market price dynamics one can`t help getting a sense of déjà vu when looking at the chart of US dollar index as it bears a very familiar Elliott Wave price structure to one seen not so long ago.

Since topping out in 1985 the US unit has been trending broadly lower. The first leg of the bear market was quite dramatic in that bounces were relatively shallow as selling pressure weighed down on the price resulting in a sharp decline with very powerful momentum characteristics. This first phase (which I will call the “momentum” phase) based out in December 1987 and then a good-sized recovery ensued over the next 18 months which I have labelled as the (a) leg of an a/b/c Elliott Wave (bear market) correction.

After the (a) leg topped out in June 1989 the bear market resumed but a subtle change occurred as each push to a new low for the trend formed a so called “overlap” as it was followed by a powerful counter-trend rally which eclipsed the previous swing low. I have termed the (b) leg as the “choppy decline” phase of the bear market.

After basing out in April 1995, the (c) leg got underway lasting some six years before a top formed to complete the entire a/b/c (bear market) correction paving the way for the next phase of the long-term downtrend.

Hitting the fast forward button and turning to more recent price action we can see that a similar structure unfolded from the 2005 swing low (labelled “MOM LO”) to the January 2017 swing high. The (a) leg rebound from “MOM LO” (as in 1988/89) saw the strongest advance of the bear cycle to date which was followed by a choppy, overlapping decline (“choppy decline”) to new lows for the downtrend in the (b) leg of the pattern which finally based out in May 2011 at the all-time low.

The rally from there broke down into five sub waves as it usually does in the (c) leg position, with the breakdown from this January`s peak seen as the initial stages of a new multi-year downtrend for the US dollar.

In addition to my reading of the Elliott Wave price chart structure there are other supporting factors which favour a lower USD going forward.

Since President Nixon scrapped the Bretton Woods Agreement in 1971 and in particular since the late 1980s there has been a clear bias for Republican Administrations to preside over a weaker currency. The US dollar has declined in value by close to 14% over the combined terms of Republican Administrations while it has risen by an average of 15% when Democrats have been in power.

The current incumbent has stated a strong desire to address what he sees as an unfair advantage his trading partners have over the United States via a weak currency so a weaker US dollar may not meet with too much displeasure in Washington DC.

Long-term cycles

Since becoming a free-floating currency, the US dollar while seeing a gradual decline in value against its main trading partners, has seen some very powerful multi-year price swings in both directions. Since August 1969 there have been six major price swings lasting an average 7.9 years and seeing a typical change in the value of the US dollar of some 67%.

At the January 2017 peak, the USD had been rising for five and a half years since the all-time low and over eight years since the 2008 financial crisis in a move which saw a net gain of around 54%. The extent and duration of the recovery in the US unit placed it in a highly vulnerable position, i.e. ripe for a bearish turn in major trend.


The recent crack in the armour of a previously impregnable US dollar may be dismissed as “corrective” or “temporary” by those who are unable or unwilling to consider changing their inherently bullish bias to the world`s reserve currency. However, as Bob Dylan once said, “The Times They Are A Changing” as evidence from many quarters points to the dawn of a not so new multi-year downtrend in the U.S. unit.

A devaluation of 20 to 30 percent from current levels against the major currencies would not be out of the question and may well turn out to be a conservative estimate of what one can expect if history is anything to go by. Don`t get caught fighting the last war…