- Asset markets are remarkably complacent
- Speculative positioning in VIX futures at a record short
- UK data is important as a test for market conviction
- USDJPY 100 level looms after disappointing data
By John J Hardy
The reaction to the weak US retail sales data on Friday was partially unwound by the close of trading before the weekend, suggesting that the big dollar is putting up a bit of a fight here – or perhaps merely showing that this market is unwilling to make much of a statement in any major currency amid remarkable complacency in asset markets – the speculative positioning in VIX futures is at a record short, according to IMM data on US futures. Also at a record speculative short is sterling positioning as GBPUSD nears the post-Brexit lows.
This week’s, currency traders’ attention should turn to the key lows for the cycle in sterling as we await the UK data on Wednesday. The data itself is rather stale, given we’re only getting July data for jobless claims, as the unemployment/earnings data is still for June. But given the speculative extreme in sterling and the fact we’re poised at key lows for the cycle, this week’s UK data is more important as a test for market conviction on the trade. At some point, we’re going to get the inevitable and tremendous short squeeze in sterling – but from here or from marginal new lows?
Elsewhere, the USDJPY 100 level looms after Japan reported weak growth overnight and the market remains underwhelmed by the recent stimulus announcements. It is clear that JPY crosses have little correlation with global risk appetite, and in fact, that correlation may have turned negative if the key driver of JPY strength is hedging of foreign bond purchases, as at least one article
in the fairly recent past has argued. So the JPY may not weaken until this flow is choked off by a rise in longer yields (as longer duration bonds fall rapidly in price when yields rise). The fall in US interest rates and the course of USDJPY certainly look correlated over the last several quarters, as seen below.
Chart: USDJPY and US long rates
The USD pair that bounced back the least on Friday in the wake of Friday’s weak US data was USDJPY. As we argue above, a key driver of the downside in USDJPY in recent months could be JPY-hedged flows into US treasuries and other bonds by Japanese investors. This might mean that we need either a notable rise in longer global interest rates or a more forceful signal from the Abe government to get a more sustained rally going in the major JPY crosses.
The G-10 rundown:
USD – trying to regain its feet in places after the weak retail sales data on Friday, but so far showing little follow on momentum. Searching for the next real catalyst as incoming data not doing the trick for now amidst all of the complacency. Risk off would likely support quite strongly if complacency suddenly fades.
EUR – EURUSD has been a long walk in the desert for months for trend trader. Friday’s reversal of the rally attempt is a tactically bearish setup, but conviction seems low everywhere and vols are collapsing, so let’s await more notable developments either above 1.1250 or below 1.1000 (the latter preferred.)
JPY – USDJPY reacted the least to the attempt at a USD comeback on Friday, suggesting the risk of a test of the 100.00 level, but hard to see drama here amidst extreme complacency.
GBP – as we note above, the market is very short, if justifiably so, which could mean a mounting risk of short squeezes. The UK CPI data tomorrow and other data on Wednesday the next big test for sterling.
CHF – the 1.0800-1.0950 range in EURCHF continues to dominate. Meanwhile, USDCHF has twice found support near the 61.8% retracement of the rally off the recent lows, offering the bulls a hook for getting involved tactically for a test back higher.
AUD – the Reserve Bank of Australia minutes up overnight and Australian employment data up mid-week as AUDUSD tries to decide whether the break to new multi-month highs above 0.7675 was a false one – a knockout punch is needed this week to make a statement.
CAD – USDCAD not getting much of a bounce on Friday after the US numbers as oil has pushed notably higher – though the correlation there has slipped, suggesting other drivers for the Loonie, perhaps (as we have noted multiple times) the very weak structural situation for Canada (large and growing current account deficit and enormous private debt load).
NZD – Kiwi in an interesting place after the recent rejection of the new highs in NZDUSD and as we have the Reserve Bank of New Zealand’s Wheeler up speaking tonight and NZ employment data on Wednesday.
SEK – The range highs toward 9.60 in EURSEK held recently and we can perhaps discuss a higher range of 9.40-9.60 and a lower range of 9.12-9.40. Some backing up before a push into the lower range is the low conviction outlook here.
NOK – the move in NOK on the strength in crude oil has been rather brutal and could back-fill a bit, but important to note that the EURNOK support zone in 9.20/15 is in play and a break could lead to a test of 9.00 next.
Upcoming Economic Data Highlights (all times GMT)
- 1230 – US Aug. Empire Manufacturing
- 1400 – US Aug. NAHB Housing Market Index
- 2030 – New Zealand RBNZ Governor Wheeler to Speak
- 0130 – Australia RBA Meeting Minutes
– Edited by Clare MacCarthy
John J Hardy is head of forex strategy at Saxo Bank