A very astute note from Citi’s FX guru Steven Englander regarding yesterday’s market action, and what it means.
Basically he sees ongoing deterioration in Europe (wider yields, wider CDS spreads, a lower euro, etc.) but not too much fear outside the Eurozone, as traders hang onto glints of optimism and recovery.
As such, he writes…
However, the risk-off move is concentrated in the euro zone and the ripple effect is being felt much less in other markets than was the case in March though May. Oil and non-oil commodity prices are holding their own. Moreover indicators based on FX implied volatilities have barely moved. (Figure 3). In the chart the blue line is the average of 10delta 1m risk reversals and the red line is the average of 1m implied ATM volatilities for a set of very risk sensitive G10 currencies. They are not showing the degree of angst that euro zone related risk measures are showing. My interpretation is that investors still want to buy risk and are waiting to see if: 1) the euro zone goes into free fall, 2) the Chinese equity markets responds to the second rate cut, and 3) the payroll numbers confirm ADP. Given half the chance, investors seem willing to buy risk despite the euro zone disappointment – the question is whether they will get that half chance.
So the question is: Will today’s NFP number give them that chance?