FX Update: Position squaring in FX as new covid strain roils mkt
Summary: The contagion across asset markets triggered by new covid strain concerns has hit FX in the form of classic deleveraging, as euro and yen shorts are squeezed on a reversal of recent US yield rises and safe haven seeking, while the US dollar gets a pass elsewhere because it is still safer than smaller, less liquid currencies, particularly in EM. The timing is terrible for this wave of risk aversion as we have thin trading conditions over the US Thanksgiving holiday.
FX Trading focus: Position squaring hits heavy euro- and yen shorts
Risk contagion across the board overnight on the news of a new covid strain in South Africa with significant mutations and signs of overtaking as a percentage of cases in regional outbreaks. There may a sudden “straw that broke the camel’s back” angle to this, given the covid concerns elsewhere, particularly in Europe. The timing is worse than unfortunate, as the liquidity backdrop of particular concern as the news has hit with the US out on holiday yesterday and only open for half a session today, with few likely anticipating until last night or this morning that they would even need to bother showing up for work today.
The sense of whiplash has been particularly acute as we have just had a look at US President Biden nominating Powell for a second term and many highlighting the focus on inflation in his acceptance speech for the nomination, with Brainard’s acceptance speech also highlighting inflation as a major concern. This had jolted Fed expectations for next year to new highs for the cycle at the outset of this week, and now just a few days later we get covid mutation concerns that have sent a deleveraging wave across markets.
In US treasuries, this has mean a sharp drop along the entire US yield curve, giving the euro and the yen a strong boost, as the euro in particular was headed south and fast on the policy divergence theme of the ECB seen likely to maintain zero rates and even some level of QE out over the horizon while the market had priced in three full Fed rate hikes by the end of next year before this sudden reversal. On the weak side, while the US dollar has fallen within the G3 and is approximately flat against sterling, the smaller currencies are sharply lower against all of the above, and EM generally doubly so. Meanwhile, a chunky new drop in oil prices on the anticipation of widening international travel restrictions and even domestic lockdowns in places is adding to the NOK woes just after that currency was trying to recover versus the single currency last week, sending EURNOK up through its 200-day moving average and above 10.20 at one point today after trading below 9.70 barely over a month ago.
Chart: AUDJPY
AUDJPY is doing its usual job of capturing a wave of risk aversion as the lurch lower in risk sentiment was reflected here, and the clearly important 200-day moving average gave way with a bang. This is beginning to demolish the longer-term bullish hopes as it is a hold below the 200-day moving average here is a kind of confirmation of the rejection of the next cycle highs above 85.00 that were attempted last month. Theoretically, if the last gasp support of the 61.8% retracement of the local rally wave can avoid falling, there is shred of hope, but that would likely depend on a full reversal of everything we have just seen overnight.
As we emphasized in this morning’s Saxo Market Call podcast, it is impossible to know how the virus situation shapes up here until further details emerge, but the market appears poorly positioned here for a more difficult global growth outlook at a time was just on how much the Fed is going to have to course correct and end QE and hike rates because US Q4 GDP is running incredibly hot. And that was in turn driving the predominant focus on relative policy divergences, with especially Europe being singled out for its particularly weak outlook, given the energy crunch and it being at the epicenter of the latest covid wave.
If I am to poke around at places where moves are getting a bit overdone here in the short term, the EURSEK squeeze move looks a bit excessive, but that isn’t to say that poor liquidity and the usual market correlations can’t send it squeezing higher still. Yesterday, the Riksbank brought a rate hike into its forward guidance (late 2024) for the first time for the cycle at a time as the market is front running that and even pricing the ECB to achieve lift-off next year. Trading a market move like the one has developed overnight is tricky business as anything can happen and either direction. Concern may deepen and dramatically so that nations will scramble to limit the spread of this new variant until more is known, and we still know little about its virulence. And in the very short-term, a self-propelling position squaring can extend aggressively ahead of the weekend as risk managers force adjustments linked to the blow-up in volatility. Then the gap risk can move in the other direction over the weekend. Impossible to know, only to limit risk and exercise patience and a couple of weeks or more of headline risks before we know the lay of the land better.
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FX Trading focus: Position squaring hits heavy euro- and yen shorts
Risk contagion across the board overnight on the news of a new covid strain in South Africa with significant mutations and signs of overtaking as a percentage of cases in regional outbreaks. There may a sudden “straw that broke the camel’s back” angle to this, given the covid concerns elsewhere, particularly in Europe. The timing is worse than unfortunate, as the liquidity backdrop of particular concern as the news has hit with the US out on holiday yesterday and only open for half a session today, with few likely anticipating until last night or this morning that they would even need to bother showing up for work today.
The sense of whiplash has been particularly acute as we have just had a look at US President Biden nominating Powell for a second term and many highlighting the focus on inflation in his acceptance speech for the nomination, with Brainard’s acceptance speech also highlighting inflation as a major concern. This had jolted Fed expectations for next year to new highs for the cycle at the outset of this week, and now just a few days later we get covid mutation concerns that have sent a deleveraging wave across markets.
In US treasuries, this has mean a sharp drop along the entire US yield curve, giving the euro and the yen a strong boost, as the euro in particular was headed south and fast on the policy divergence theme of the ECB seen likely to maintain zero rates and even some level of QE out over the horizon while the market had priced in three full Fed rate hikes by the end of next year before this sudden reversal. On the weak side, while the US dollar has fallen within the G3 and is approximately flat against sterling, the smaller currencies are sharply lower against all of the above, and EM generally doubly so. Meanwhile, a chunky new drop in oil prices on the anticipation of widening international travel restrictions and even domestic lockdowns in places is adding to the NOK woes just after that currency was trying to recover versus the single currency last week, sending EURNOK up through its 200-day moving average and above 10.20 at one point today after trading below 9.70 barely over a month ago.
Chart: AUDJPY
AUDJPY is doing its usual job of capturing a wave of risk aversion as the lurch lower in risk sentiment was reflected here, and the clearly important 200-day moving average gave way with a bang. This is beginning to demolish the longer-term bullish hopes as it is a hold below the 200-day moving average here is a kind of confirmation of the rejection of the next cycle highs above 85.00 that were attempted last month. Theoretically, if the last gasp support of the 61.8% retracement of the local rally wave can avoid falling, there is shred of hope, but that would likely depend on a full reversal of everything we have just seen overnight.
As we emphasized in this morning’s Saxo Market Call podcast, it is impossible to know how the virus situation shapes up here until further details emerge, but the market appears poorly positioned here for a more difficult global growth outlook at a time was just on how much the Fed is going to have to course correct and end QE and hike rates because US Q4 GDP is running incredibly hot. And that was in turn driving the predominant focus on relative policy divergences, with especially Europe being singled out for its particularly weak outlook, given the energy crunch and it being at the epicenter of the latest covid wave.
If I am to poke around at places where moves are getting a bit overdone here in the short term, the EURSEK squeeze move looks a bit excessive, but that isn’t to say that poor liquidity and the usual market correlations can’t send it squeezing higher still. Yesterday, the Riksbank brought a rate hike into its forward guidance (late 2024) for the first time for the cycle at a time as the market is front running that and even pricing the ECB to achieve lift-off next year. Trading a market move like the one has developed overnight is tricky business as anything can happen and either direction. Concern may deepen and dramatically so that nations will scramble to limit the spread of this new variant until more is known, and we still know little about its virulence. And in the very short-term, a self-propelling position squaring can extend aggressively ahead of the weekend as risk managers force adjustments linked to the blow-up in volatility. Then the gap risk can move in the other direction over the weekend. Impossible to know, only to limit risk and exercise patience and a couple of weeks or more of headline risks before we know the lay of the land better.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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