Complacency ahead of FOMC

Good FOMC eve morning. Busy day today, so this one will be quick! Fed Funds Futures are pricing an 88% probability that the Fed will balk tomorrow. While I ultimately agree that the Fed won’t hike tomorrow, they’ll absolutely jawbone that they’re ready to do so.  That type of complacency is just the type of asymmetric risk, I thrive on. Firstly, remember that it’s ultimately the expectation of rate hikes that gets rates all backed up and sends USD higher. As such, Fed inaction will usher in renewed expectations of a future hike. I expect this to manifest itself in a higher probability of a hike at the next meeting, which is September, which is currently being underpriced. That repricing should bring forward/steepen the probability-weighted rate curve. I’m currently expressing this view with $XLU, /ES and /6B puts, that I’ll trade out of immediately following the release of the decision, tomorrow. My gut-check on FX and /ES volatility appears low, and thusly doesn’t warrant hedging with a vol crush carry, so I’ll ride this decision unhedged.

That said, I’ve ridden oil lower over the last weeks to great success. It’s dancing on support at the 43.50 level. I see a retest of 40, but given the repricing risk from FOMC and relatively subdued /CL volatility, I might hedge my short position with holding some OTM calls just through tomorrow.

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