Last week’s recap
The Treasury decided to intervene in the domestic market as well, announcing a doubling of the limits on the government bond buyback. The programme runs from 9 September to 4 November — which is to say it is timed to the elections and to the Fed meeting, and the intent is to paper over the negative.
The genuinely important part is not the size of it. It is that they have now flagged their pain point on the Treasuries, and the market has seen it and will remember it. Because the size is not impressive: $4 billion, announced verbally, in the same manner as the yen interventions. That is not enough to hold this market for long.
Otherwise last week moved in the direction discussed. I got in a little with market orders; in some places price never reached the limit orders, and in others we are simply still travelling in the right direction.
EUR
Interesting options showed up here. The central strike and the first and second strikes are sold, and between them they have drawn the working ranges: above 1.1988 it is close to unrealistic to get through.
The straddle is very interesting into Wednesday, and given the day’s balance at the open it is attractive for longs on a pullback and for sells on a push up. For now the main plan is to buy it back. At least a 1:3 ratio when taking profit, on both sides, with the remainder left in the market at breakeven.
GBP
Briefly on the pound: the zones of Wednesday, of the Week and of the Quarter, together with the probabilities of reaching each and of breaking through it.
AUD
The zones of Wednesday and of the Contract. The weekly one is useless this time because it sits right next to the Contract boundary. From the open the intraday zones are the interesting part.
At 0.7122 they added 700 contracts as support, almost at the high — so that is one to try to buy back. Until expiration the 73 strike looks close to unbreakable.
Gold
Plenty here from the open. 4530 and 4543 are both on the list to work. Right at the open there is support at 4642–4644, but only within the first one to two hours. 4593–4595 is interesting for market buys until the Japan close. Up top there are slabs in the zones as well — volume went through on those strikes and there is support there.
Off-exchange, more than 1,100 puts went through with a breakeven around 4430 on the next contract — about twelve million dollars’ worth. There is a good chance of reaching those options, so it stays on the board as a reference target; if it plays out, shorts become interesting from there. Those players shorted at the highs with a clean breakeven, though by the close the strike had emptied out.
So watch the open. If they try to break 4530, then 4315 starts lighting up, and strongly — the max pain for 20 September sits there, and I doubt they leave that Debt alone. That move gets painted if the Treasury deflates on the buybacks and the market goes back to conquering the highs.
US rates — and Jackson Hole
Just as speculators have worked against the Bank of Japan, they can now start working against the Treasury. So far it is a verbal threat with no specifics on the purchases, and $4 billion is laughable in a market that trades tens of billions in a single day.
So the funds could drag the 30-year up toward the 6 to 6.15% region before the Fed steps in and brings it back to 5% as a first target — but only a rate rise does that. Jackson Hole is the intrigue of the week, and the question is whether the chair finally gives specifics or spreads fog again.
France — a bond warning worth watching
One macro note that has nothing to do with this week’s zones and may matter more than any of them.
The yield on French ten-year bonds is now above Italy’s — a positive spread for the first time in history. French five-year CDS, the insurance against default, is above Italy’s too.
Among the large European economies the problem country has always been Italy. Romania’s situation has always been worse still, but the size of those economies and the regional impact of trouble there is not comparable. France has always been the core of the European economy after Germany, which is exactly why a structural change in how its risk is priced matters this much.
The bonds have already spoken. The CDS has confirmed it. What is left is to watch the French banks, and this could become the main macro theme of the year. We will see.
The plan, in one line
These are zones and scenarios being watched — the market decides, not the trader. Let price come to your levels and let the confirmations line up before you act. New to the terms? The glossary covers every structure named above — and if this is your first visit, where to start lays out a reading order through the free material.