Next Week's FX: Numbers Don't Lie

* FX 4 Next Week is out a day earlier than normal because May 1 is a public holiday in Denmark.

This article looks at four potential themes and, where possible, directional trades for next week, with an attempt to choose trades that aren’t too correlated.
Stateside surprises

Only half-conviction on EUR/USD pivot back lower as US data could surprise either way. We won’t know until Friday’s (May 8) US jobs report (or maybe even later) whether the squeeze in euro pairs is over with as this week's Federal Open Market Committee statement didn’t provide anything of note for traders to go on, but we are looking for the move to be over with either this coming week if US data are strong or within a couple of weeks if this data cycle triggers a further squeeze.

Trading stance: Traders might look to put on half of a strategic position in EUR/USD bearish options structures for the other side of the April and May data cycles. Here we are looking at those with expiry after the first week of June, whether outright 1.10 or 1.09 puts or 1.09/1.07 long put spreads (buying upper strike, selling the lower strike), which limit the premium risked but also limit the upside potential.
Still, long option spreads can be structured so the maximum upside is three times or more of the premium risked. The other half of any downside view should await better technical confirmation that the bears are regaining the upper hand (reversals, etc…). Those expecting bad US data might look for options structures that price in a move to 1.1500 or higher over the short term.

Broad NZD Downside

We’ve seen a notable shift to the dovish side in the Reserve Bank of New Zealand’s stance this week, a move that could well have relatively long-lasting implications for the formerly high-flying NZD. The kiwi could continue to suffer generally broad pressure for weeks or longer from here.

Trading stance: Traders may look at NZD/JPY short positions or options after the BoJ surprised by not doing anything or even shifting expectations at this week’s meeting, looking for an eventual move initially to the 88.00 area, but possible to 85.00 or lower eventually (NZD/JPY trading 90.50 as of this writing).
Weak AUD on RBA (but I still like long-term AUD/NZD upside!)

The AUD rally is fast unwinding as traders eye next Tuesday’s Reserve Bank of Australia meeting at which the central bank is likely to cut rates by 25 basis points to 2.00%. This is largely priced in, but the market will be reactive to forward guidance which can still surprise to the dovish side

Trading stance: Shorting AUD/CAD and strategically looking for new lows beyond the 0.9400 area and what looks like a head and shoulders break if it gets below that level. AUD/USD may also be shortable if the USD is putting up a broad fight again and if AUD/USD is trading below 0.7850 on a closing basis after the RBA meeting. AUD/NZD, on the other hand, may bottom out in the 1.0250/1.0300 area short term, and traders may look to buy long-dated 1.0500 call options as this pair may have put in a cyclical low recently.
GBP/USD upside overdone

Not sure if traders are rushing to buy sterling ahead of the May 7 UK election or simply rushing to cover their shorts, but this latest bout of GBP/USD upside is beginning to stretch far beyond its fundamental support. As well, the squeeze on euro short positions may not be entirely over with and there may be additional room for a EUR/GBP squeeze higher ahead of the election.

Trading stance: Consider long GBP/USD put spreads and/or long EUR/GBP call spreads looking out two-three weeks for a move back to the middle of the range since the April lows in GBP/USD and perhaps to the 0.7400 area or higher in EUR/GBP (the latter more likely if EUR/USD caught in a squeeze back higher, for example, on a weak US employment report next week.)

— Edited by Michael McKenna

John J Hardy is head of forex strategy at Saxo Bank