Sterling was beaten up on Friday as questions arise about the economy ahead of Thursday's election. The new week starts with a modest moves; the euro led last week while the kiwi and yen lagged. CFTC positions showed yen shorts now nearly back to neutral.
The pound fell more than 2 cents on Friday to form a gravestone doji. A similar bearish pattern was traced out on several crosses as the US dollar roared back.
Up next, the focus will be on Australia with the TD Securities' inflation estimate for April due at 0030 GMT. It's not normally a market-mover but traders will be sensitive to Aussie data with the RBA coming up. At 0145 GMT, it's the final HSBC China manufacturing PMI for April. It's expected to improve to 49.4 from 49.2 and is unlikely to
Australian cash rate futures are pricing only a 74.5% chance of a rate cut on May 5, much higher than the 50/50 proposition a week ago. Adding to the swing was a report from PeterMartin of the Sydney Morning Herald that said “concern about a deteriorating economic outlook and a resurgent Australian dollar will force the Reserve Bank to cut interest rates on Tuesday.
On the weekend, colleague Michael Pascoe questioned Martin about the story: “I asked Peter on the record if the story was a drop. He replied: 'I can't say how I got the story. It is accurate.'”
We also remind readers that markets have moved 20-40 seconds ahead of the past 3 RBA decisions.
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -198K vs -215K prior JPY -6K vs -14K prior GBP -34K vs -29K prior AUD -27K vs -34K prior CAD -21K vs -27K prior CHF +1K vs 0K prior
The still-abundant size of the euro short position underscores just how large of a squeeze is possible in the euro. Yen positioning is nearly neutral. Note that on the weekend Kuroda said the timing of reaching the inflation target will be slightly delayed. He emphasized that stimulus isn't needed but it's the first time he's talked about missing the target.
|49.2||May 04 1:45|
|Eurozone Markit PMI Manufacturing (APR)|
|51.9||51.9||May 04 8:00|
تصريح لجنة السوق الفيدرالية المفتوحة أتم الصورة الحمائمية الفورية لها باعترافها بالتباطؤ الشتوي، مع تعزيز وضعية الدولار الأمريكي بتخليها عن تقويمها الاسترشادي واستبداله بالتعويل على البيانات. ارتفاع كبير في الدولار الأمريكي أمام كل العملات الرئيسية بعد بيان الاحتياطي الفيدرالي مباشرةً، فيما تراجع بمقدار سنتين أمام اليورو والإسترليني والدولار الأسترالي. المزيد هنا
The most preferred UK Election scenario for the pound and gilts would be a Conservative-led minority government. Here is why.
The FOMC's decision to abandon all time-based guidance temporarily boosted, but here is why the euro rally is not yet finished. Full charts & analysis
A weak US GDP report crushed the dollar but the Fed continues to look toward a brighter future. The dollar was near the bottom of the FX rankings but bounced on the Fed to finish ahead of JPY and NZD. The kiwi was hurt by the RBNZ and the yen is in focus with the BOJ later. Yesterday's EURUSD trade came close to its final target and remains in the green. EURAUD deepens, while NZDUSD, GBPAUD, and EURGBP premium trades remain in progress. AUDNZD long was opened minutes prior to the RBNZ announcement and remaisn well in the green.
At this point, most of what can be said about Q1 GDP (dismal) and the Fed (optimistic) has already been said. Instead, we take a look at the intermarket dynamics that illustrate the squeeze that's taking place in the euro, which posted its best day in six months. Knowing whether it's a squeeze or a fundamental trade helps us decide what to do next.
Looking only at FX, we know that euro shorts are a crowded trade. The CFTC futures positioning data shows net shorts near a record. That alone left EUR/USD shorts vulnerable to a squeeze but earlier this year they held strong in tests of 1.10.
How do we know this time was different?
We know because the euro trade wasn't only in FX. Many traders focus only on the market in front of them but taking a broader view shows us that long-term trades are clearly being unwound. One major trade has been the ECB QE bond trade with many funds outside the Eurozone taking part. They bought German Bunds, helping to drive yields below 0.10% but a large portion of those traders hedged the FX portion of the trade because, naturally, they were worried about euro weakness.
In the bond market today, there was clearly a rush to the exits in German Bunds. Yields moved up 12 basis points to 0.285%. As those traders exited the trade, they also unwound those hedges, which meant buying euros and selling dollars.
The same trade took place in the German DAX. The main stock index was down 3.2%.
In summary, today's trade had all the hallmarks of institutional, real money traders bailing out on what had been a very successful trade. That kind of thing can feed on itself for days. Keep a very close eye on Bunds and the DAX in the days ahead for clues about whether strong hands step back in or if more cash out.
In the near term, the focus moves to the BOJ. Expectations of any action should have fallen to nil after a report today in Nikkei that Kuroda is set to maintain a forecast for a gradual rise in inflation. Question about more action has moved toward October.
|GDP Price Index (1Q) [P]|
|-0.1%||0.5%||0.1%||Apr 29 12:30|