Uncertainty Reigns

Uncertainty Reigns

The uptick in rising US yields is underpinning USDJPY, but it was the gains in equities as all three major U.S. stock indexes clocked in all-time closing highs that provided the major overnight sentiment gauge. Ultimately this buoyant risk sentiment should be cheered, but  FX traders remain in the Nervous Nellie camp waiting for the next chaotic patch given the evolving narratives. A word of caution to those enjoying this unexpected sea of tranquillity, the next few weeks and months come with significant risk

It’s incredible just how quickly the sentiment around the USD has changed this week as deeply ingrained attitudes to fade the dollar rallies has given way to traders awaiting a deeper position squeeze on short dollar positioning. But from my seat, however, it feels like the bulk of the squeeze has occurred and that this current resounding risk rally is stoking the USDJPY fires as CrossJPY continues to race higher. But indeed, the large short dollar positions into the weekend and the surging US yields on Monday provided  the primary drivers behind this remarkable USD revival.

However,  the long dollar position is not without considerable risk as  Fed market positioning suggests this dollar revival is little more than a respite.Tepid wage and inflation numbers are posing a conundrum for the Fed and of course, the dollar will remain an endangered species as dealers await the next Trump administration gaff.

One issue that is being discussed in market circles is that as far as US economic data is concerned, the Hurricane effect may give rise for the Feds to look through inflation data as the storm surges has likely stretched the feds window to dismiss data

The only things that appear certain today is uncertainty itself

The Euro
In the absence of any Euro particular set of drivers and lieu of the current dollar correction, the shooting star reversal is not all that surprising.But despite the sell off from massively overbought levels above 1.2000 the Euro bulls are not giving up the game quickly and remain firm buyers on dips

The Yen
From here, all roads lead to the US CPI on Thursday, which has been a key driver of dollar sentiment all year. ON a solid print the dollar rally extends to 111.25, but on a wrong impression we’re quickly back to the 109’s as there should be a massive wave of USD selling across the board
Chinese Yuan

After all that has been said and done the logical explanation for the Reserve Requirement shift was that the Pboc are concerned about the pace of depreciation of USD/China. The authorities intend to create more two way flows as hedger will now come back to cover USD exposures with as the authorities  hope that more price stability will naturally occur. But from my seat, I think this recent move will provide an excellent opportunity to increase RMB exposure as all things China continues to look Rosy
EM Asia

USDAsia has stuck in a range bound rut despite general USD strength in the market. The market positioning remains relatively light on either side of the coin after Friday rally and subsequent correction Monday. But so far the Asia EMfx has been somewhat immune to the recent USD rally as risk appetite is buttressing local sentiment.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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