Every business day of the week there are financial options which expire. Some of these options are related to stocks, energy, commodities, Forex and fixed income products.
However, four times a year, in the US market, there is a confluence of option expirations for equities, futures, index futures and individual stocks that occurs all on the same day, which is know as “Quadruple Witching.”
As is often the case, Wall Street indexes have traded higher into today’s expiration, while the USD has drifted lower. As a general theme, US equities have a historic track record of reverting lower during the week following Quadruple Witching but the USD has followed a largely random pattern.
This week’s high frequency US economic data has been soft, with the PPI, CPI and Retail Sales reports barely meeting consensus forecasts or printing slightly lower.
Many market commentators believe these weaker readings underscore the FOMC’s rhetoric on being patient and data driven with respect to future interest rate policy adjustments. We don’t agree.
Over the last 10 years, the USA has developed a pattern in which overall growth aggregates reflect the softest numbers in Q1, before rebounding into Q2 and peaking in Q4. Further, taking into account the Government shutdown in January and the very severe North American winter, it seems the US has shown more underlying resilience than the rest of the G-7 economies.
A good illustration of this resilience is highlighted by the amount of outstanding global Treasury debt that falls below the zero bound. There are currently $9.7 trillion worth of negatively-yielding bonds in the global system; most of which are domiciled in Europe and Japan.
By contrast, the US FED FUNDS rate stands at 2.50% and the Treasury curve has a decisively positive slope across all of the tenors. As such, we look at the recent slide in the USD as transient and expect Forex traders to bid the USD higher after today’s option expiration and into next week’s FOMC meeting.
The EUR/USD has been firm after trading down to 1.1175 last week. The pair has not posted a NY close above the 30-day moving average in over three weeks, which is currently at 1.1325. We see scope for a move back into the resistance area of 1.1340/50 but still see more potential to the downside.
Our trade suggestion to add to short positions at 1.1285 was filled, which lowers our average price to 1.1375. We suggest holding short from 1.1365 with an initial target of 1.1120 and a 1.1490 stop.
In theory, a move lower on Wall Street after today’s option expiration should trigger a “risk off” response and drive the USD/JPY lower. Today’s BoJ announcement was not a driver of the pair and the daily charts are showing divergence in the momentum indicators.
Our trade suggestion to add to short positions at 111.60 was filled, which lowers our average to 111.65. We suggest holding short from 111.65 with an initial target of 109.70 and a 113.25 stop.
Similar to the EUR/USD, the AUD/USD has firmed after last week’s test of .7000 and has pressed against the .7100 level. The next area of resistance is near .7125 and there’s a $500 million option expiring today at .7060. Our suggestion to add to short positions at .7095 was not filled, which leaves us short from .7145.
We suggest holding short from .7145 with an initial target of .6940 and a .7195 stop.
The Sterling has easily been the most active currency this week, with the GBP/USD trading in a 440 point range between 1.3380 and 1.2940. As the Brexit withdraw saga continues to drag on, it’s becoming evident that the March 29th Article 50 deadline will be extended.
Our trade suggestion to sell buy GBP/USD at 1.240 was not filled and we suggest staying on the side line into the weekend.
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