Kit Juckes from SocGen talks about the FX market’s focus on growth dynamics at the moment and how that will mitigate any rate cut from the Fed this week.
At the same time, he worries that we will probably hear more about USD intervention in the weeks ahead, especially if/when the dollar strengthens.
“How then to position? We like EUR/JPY shorts at times of uncertainty and will stick with those. Decent US data and a dovish Fed ‘ought;’ to help those of us inclined to bottom-fish for cheaper AUD and CAD, even if neither of those positions has done us any favours in the last week. USD/CAD shorts look more secure than AUD/USD longs, but since July’s best currency so far is the Turkish Lira, despite a large CBRT rate cut, maybe yield-seekers are going for ‘proper’ yields and bypassing G10 currencies that yield less than the US anyway.”
Japan’s $1.5 trillion public pension fund has begun to put on hedges to protect against USD and EUR declines, according to a Nikkei report published yesterday.
The GPIF “has begun a transaction to avoid (hedge) losses associated with fluctuations in foreign exchange rates through fund management with foreign bonds. The target is US dollar and euro denominated bonds, and the balance at the end of March is approximately 1,300 billion yen,” the report says.
A hedge of that size will be swallowed up by the market but the signal it sends may lead others to follow. It also makes me wonder what the GPIF is seeing and why they’re worried about sudden yen strength.
A contrarian might also argue that a move like this comes at the bottom for EUR/JPY and USD/JPY, but I’m not sure I’d make that argument.
The dollar gained against most of the world’s currencies last week. With a few sessions left in July, the greenback has advanced against the major and all but a handful of emerging market currencies. It rose to new highs for the year at the end of last week against sterling. The risk of a no-deal exit has increased with the new UK’s new Prime Minister making demands that the EC is not prepared to grant.
The dollar is testing key levels against other major currencies that could signal a technical breakout. The euro made a marginal new low for the year last week, but the $1.1100 level held, perhaps helped by the defense of some options. The dollar knocked on JPY109, an important barrier whose break could confirm a bottom is in place and signal scope for additional near-term gains. The US dollar had recorded the lows for the year against the Canadian dollar on July 19 a little above CAD1.30 and before the weekend tested CAD1.32, the end of and band of resistance, which if broken could spur a move toward CAD1.3350-CAD1.3400.
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Forex futures positioning data among noncommercial traders for the week ending July 23, 2019
EUR short 39K vs 31K short last week. Shorts increased by 8K
GBP short 79K vs 76K short last week. Shorts increased by 3K
JPY short 9K vs 11K short last week. Short trimmed by 2K
CHF short 13k vs 12k short last week. Shorts increased by 1K
AUD short 48 k vs 53k short last week. Shorts trimmed by 5K
NZD short 12K vs 17K short last week. Shorts trimmed by 5K
CAD long 31K vs 21K long last week. Longs increased by 10K
Prior week
Highlights:
GBP shorts remain as the largest position. The GBPUSD moved to new 27 month lows today rewarding those traders.
AUD shorts are the 2nd largest position and the AUD moved to new month lows today retracing the run higher from the June 10 low
The EUR shorts increased by 8K. The EURUSD moved modestly lower this week. The EUR short has been cut from over -100K short to 31K (the fall in short positions seems to have slowed over the last month.
Speculators remain long the CAD. It is the only major foreign-currency long position versus the US dollar
The GBPUSD has falled to a new 2019 low on the break of the July 17th low at 1.23815. The price has traded to 1.23755 so far.
In trading to new 2019 lows, the pair is trading at the lowest level in 27 months (April 2017). The next target from the weekly chart above is at the April 2017 low at 1.2364. The March 2017 low was at 1.23599. Moves below those levels open up the downside even more.
The price action this week has seen the price move below the 1.2441-748 area (see yellow area on the chart above). That area is defined by 2018 lows and weekly lows from June and early July. Last week, the price fell below that level only to rebound back above. This week, the pair will close below that swing area….(see red circled numbers).
Drilling to the 5 minute chart, the pair has accelerated and trended lower in the NY session. The session in the London and NY session has been able to stay below the 200/100 hour MA (there was a brief move above the 100 bar MA in the London session but stayed below the 200 bar MA). It cracked below a lower trend line in the last couple hours that accelerated the fall.
The 38.2-50% of the last trend leg lower comes in at 1.2396-1.2400 now. The trend line cuts across in that area. For the trend traders looking for more, that area is a risk/trend defining area. Stay below, keeps the trend intact.
The US GDP came in better than expected at 2.1% vs 1.8%. The price index was higher at 2.4% vs 2.0%. The Core PCE was lower than expected at 1.8% vs 2.0% estimate.
The dollare has moved higher in the initial reaction.
The USDJPY moved to the highest level since July 10, and to new week highs (taking out the high from yesterday at 108.75. The high reached 108.823 so far. The price moved up from 108.66.
The EURUSD moved from 1.11385 to a new low for the day at 1.11274. We trade at 1.11316. The pair remains in a narrow 23 pip range for the day
The GBPUSD took out the lows for the week at 1.24174. The low price moved to 1.24127. We currently trade at 1.2414 near the lows.
If you expect the Fed to follow the ECB, then USD/JPY longs are the place to be.
That’s the brewing signal in USD/JPY as it rises to a two-week high of 108.55. A Fed cut next week is almost a sure thing but a further cut is less certain and either way I don’t see the Fed pre-announcing anything.
Technically, USD/JPY is still in a tough spot but we now have at least one higher low over the past month. It will take a break above 109.00 to spark any kind of real rally but the conditions are there.
The euro hit a fresh two-month low after more disappointing economic data highlighted the currency area’s struggle with weak economic growth.After another contraction in Germany’s manufacturing sector, according to purchasing managers’ data for July, the euro fell to levels it last touched in late May, down 0.2 per cent at $1.1123. It last closed under that level in mid-2017.
The numbers came in the run-up to Thursday’s hotly anticipated monetary policy call at the European Central Bank. It is expected to pave the way for a return to stimulus at the meeting, in an effort to energise the eurozone’s anaemic economy.
There was a rally for German government debt on the prospect of more stimulus, while the uncertain economic outlook also highlighted the relative safety of Bunds, sending yields toward record lows. The 10-year Bund yield touched minus 0.383 per cent, down 2.6 basis points.Frankfurt’s Xetra Dax 30 touched a fresh two-week high, helped by a recovery for industrial stocks.London’s FTSE 100 came off a three-day rally, dropping 0.8 per cent. It was hit by falling metals stocks, which tracked lower iron ore prices, with production expected to resume at a major Brazilian mine.A resurgent sterling also knocked UK stocks. The pound regained 0.4 per cent to trade at $1.2484 as investors watched events in Westminster on Boris Johnson’s first day as prime minister.Wall Street’s S&P 500 slipped 0.2 per cent after a series of lacklustre earnings and as investors were faced with the prospect of government scrutiny of the technology sector.The caution also came as investors measured further signs of an economic slowdown against optimism on US-China trade negotiations.
The IMF on Tuesday lowered its forecast for global economic growth by 10 basis points to 3.2 per cent for this year — the weakest rate of expansion for a decade — and 3.5 per cent for 2020. It cited risks from Brexit as well as global trade tensions.Hopes for improved relations between the US and China came after it emerged that top Washington officials were seeking to reignite trade talks.Hong Kong’s Hang Seng index added 0.6 per cent and mainland China’s CSI 300 was up 0.8 per cent.
Secret message?
