Unwind of the Unwind Continues
Not unexpectedly, price action is suggesting that both the G10 and EM FX complex are paring back bets heading into the weekend. While a pre-weekend position cull has been in vogue for weeks, we’re seeing a greater propensity for position unwind this week due to the high level of investor anxiety over the French election narrative. Also, geopolitical angst, a faltering US economy and the UK snap election are consuming investors mindsets. With so many uncertainties offering few incentives for investors to re-engage risk exposure, clearly there is little market bravado as dealers appear to be disposed to participate after the fact, rather than play the post-election knee-jerk.
In the markets, a cutting move lower in crude was the primary catalyst for price action overnight, weighing on US equity markets after the Dow and S&P initially rallied on some positive earnings results. WTI prices fell after an unanticipated jump in US gasoline inventories and smaller than expected purge in US Oil stocks.
The Fed’s Beige Book reported the common middling expansionary theme, which had little impact on the dollar, but indicates that the Feds are remaining guardedly optimistic. However, with deepening concerns about the state of the US economy and risks that the Trump Administration policies could underwhelm, notwithstanding the absence of fiscal commitments, we could be in for further USD misfortunes in the near term. Dogged concerns on the Korean peninsula and French election this weekend will be the name of the game as we close the week out.
The French election is the dominant narrative for the euro. Despite the recent move above 1.0700, which was primarily driven by position overhang, a further extension of the current euro rally will need to include centrist Emmanuel Macron in round two run off, as his margin of victory going head to head against the other candidates looks decisive. But the closeness of the polling numbers for all four candidates entering round one increases the likelihood for a surprise, as it would take little in the way of undecided swing vote to turn the tables for any one candidate. Given the unquantifiable risks entering the weekend, markets have become lukewarm in the EURUSD trade, which has barely broken a sweat overnight, with volumes running well below average.
The least surprising trade overnight was the Aussie dollar which has continued to trade poorly over the past 24 hours. The AUD feels the headwinds of geopolitical risk, lower commodity prices and a more dovish tilt from this week’s RBA minutes, as the Central Bank is emphatically not in any rush to change their neutral policy stance.
The overnight drop in Crude prices weighed on the commodity bloc of currencies, but the AUD is the Bloc’s near term whipping boy, coming in as G10’s worst performer overnight.
However , as with most of the G-10 currencies , I would expect some paring back of positions overhang entering the weekend and the AUD could find some decent support ahead of the critical .7475 level
USDJPY has established a short-term base around 108.25 as UST’s come of their low yields and as geopolitical concerns calm. I view positioning as light overall but with an overhang of freshly minted dollar shorts on geopolitical risk and weaker US economic narrative. We could see the market cut shorts ahead of the weekend, along with a USDJPY squeeze higher, which is not out of the question and even more so as liquidity peels back.
The local markets are muted as this pre-French election position squaring event unfolds. Most of the local currency positions were tapered when the Korean Peninsula risk came to the fore so not expecting much movement heading into the weekend provided the geopolitical ticker tape remains dormant.