2013/10/15

Weekly Forex Forecast - Week 42


Debt ceiling extension shifts focus temporarily back to Fed

Debt ceiling extension reveals popular pressure on republicans
In the end it looks like the republicans blinked well ahead of the October 17 deadline, or at least "half-blinked". Indeed, the fiscal shutdown that initiated on October 1 (which is not exactly the same as the debt ceiling issue), had already considerably damaged the republicans in the opinion polls, without significantly affecting the standing of President Obama and the Democrats. As such, they decided to give in to a short-term extension without conditions. It is still too early to call the shots on the final outcome of this saga, yet the bargaining position of the Republican side seems to have weakened considerably.

Next week's Beige Book might be more important than usual
At least temporarily markets will now shift their concern away from Congress (fiscal policy) to the Federal Reserve (monetary policy). Moreover, since the shutdown has also affected the delivery of reliable and sufficient statistical data, next week's publication of the Fed's Beige Book (which is a collection of anecdotal evidence on the strength of the economy in the United States), might have more impact than it usually has. There is a concrete risk that the indications out of the Beige Book might be a bit disappointing, as initial jobless claims have recently picked up. More in general, the absence of data combined with continuing uncertainty, might well induce the Fed to further postpone the taper. Or, if they would proceed, they would qualify as being a very bland taper and reserve themselves to reverse it at a minimum sign of weakness.

Nothing new under the sun?
On page 5 we discuss the investment implications of these latest political changes. We see temporary dollar weakness. But we do not think that the prospects for commodity currencies and emerging markets have significantly improved.

Overextended GBP/USD exposed to a slowing UK recovery

BoE to remain on the sidelines in the next months
As widely expected, the Bank of England (BoE) kept its interest rates unchanged at 0.5% and the size of its bond buying programme on hold at £375bn on 10 October. Given the Committee's unanimous stance on the monetary policy last month as well as the recent economic data pointing to a recovery, a more accommodative stance from the BoE is unlikely to occur in the next months. Also, the forward guidance set by the BoE does not call for a rate hike until 2015 at the earliest

The British pound has already priced in a lot of good news
With the BoE likely on the sidelines for the next months, the strength of the UK recovery is likely to influence significantly the valuation of the British pound. Despite being oversold, the recent rise in GBP/USD has been impressive, suggesting that most of the prospect of a robust recovery has been priced in. However, recent weaker than expected retail sales, as well as the surprise decline in industrial production, suggest that the recovery might not be as strong as the market expects. Thus we do not see a compelling medium-term upside potential for GBP/USD at the current prices.

Strong resistances around 1.63-1.64 area in GBP/USD
Looking at the chart, the major resistance area between 1.6302 (30/04/2012 high) and 1.6381 (02/01/2013 high) coupled with long-term declining trendlines confirm that a move above these levels will be hard. In the short-term, the medium-term rising trendline could spur a recovery in GBP/USD, but, in the medium-term, we see the region around 1.63 as an attractive medium-term short opportunity

The never-ending US fiscal saga continues

Nothing new under the sun
What are really the implications of the now very likely six week extension of the debt ceiling? First and foremost, the continuation of the uncertainty is going to prevent the Federal Reserve from taking a very aggressive stance. Thus the US dollar is going to remain under pressure, also versus the euro as the ECB is unlikely to adopt a monetary stance which is significantly more expansive than its current one (over a longer period we still see Europe's single currency weakening against the greenback). Likewise, while we caution against massive strengthening of the pound sterling (see page 4), the Fed's cautious stance is certainly giving some short-term upside potential to cable. And whilst we could also envisage some very short-term strength of commodity currencies, here we really think that the provision of continuing central bank liquidity might well continue to go hand in hand with further weakness of the Aussie, and other natural-resource based currencies. Likewise emerging market currencies are not significantly going to rebound as their commercial surpluses continue to shrink and the vulnerabilities of some emerging markets have clearly come to the forefront, independently of the prospect of the taper at some point in time.

Yet something has changed
The fact that emerging markets and commodity prospects have hardly changed in spite of monetary policy plausibly remaining on hold tells us something interesting about the six week debt ceiling extension. Sometime, as these coming six weeks run their course, we could expect renewed tension as towards the middle of November a deal must be made (or another short-term extension is decided). At that time, all risky assets, such as equities and emerging bonds, might again come under pressure. Thus there is a concrete risk that the prospective weakness of the Japanese yen and the Swiss franc might be short lived.

Aussie and Swissie favoured by purchasing power parity

Three currencies seem too far away from their "fair value"
The purchasing power parity is an economic theory that allows to derive the long-term "fair value" of a currency relative to another. Calculation of this fair value usually derives from either the consumer price index (CPI), the producer price index (PPI). A well-known alternative to general price baskets is the Big Mac Index. The OECD has developed a specific basket that is also widely used. At the end of September, three currencies among the major ones have one or more PPP measures that are viewed as overvalued or undervalued compared to the US dollar, calling for long-term move back to their estimated fair value.

The Aussie and the Swissie remain overvalued
The first one, USD/CHF is overvalued by three measures (CPI, Big Mac and OECD). Given also the SNB's threshold at 1.20 in EUR/CHF and the looming US tapering, we see very little limited medium-term downside risk in USD/CHF.

The AUD/USD is in our opinion much more interesting and overvalued by two measures (CPI and OECD). This overvaluation confirms our longer term bearish view on the AUD/USD. Indeed, the growth rebalancing from the slowing mining sectors to the rest of the economy will force the Reserve Bank of Australia to keep an accommodative monetary policy for an extended period of time, supporting a weak AUD/USD.

The third one, USD/JPY is undervalued by one measure (Big Mac). Yet, we continue to favour further longer term rise in USD/JPY towards 105.50-110.00 given a persistently accommodative Bank of Japan. Thus, given the BoJ's very aggressive unconventional policy, the JPY might weaken further, yet the bulk of weakening might already be beyond us an investors should get cautious above the 105 level.


2013/10/08

Weekly Forex Forecast - Week 41

Europe gradually stabilising

Italy's political developments confirm political stabilisation
For the first time in 20 years Mr. Berlusconi has been outmaneuvered by the political movement he himself created. Italy has now, for the first time over the same period, a government that not only has an ample majority in the parliament. It is above all a homogeneous government composed of the most moderate faction from both the right side and the left side of the political spectrum. The chances, therefore, that this government might be able to finally pursue some badly needed reforms is high. Being both mainstream parties in the government, special interest groups and unions will have a harder time to push for the safeguarding of their particular privileges.

Slow adjustment in the periphery
Except for Italy, all other periphery countries have already achieved a significant adjustment of their competitiveness versus core countries, mainly through a reduction in labor costs. This does not mean that the growth pick-up, which will continue to materialize over the next coming months, will be very strong. It will be weak, and it will be weak for years to come. The main point is, however, that - barring a major global crisis - there will no massive austerity measures that would further create severe growth slowdowns.

Stabilisation explains temporary strength of the euro
As will be better explained on the next page, it is the the current stability that is preventing the ECB from taking more aggressive liquidity actions, in spite of being the only central bank whose outstanding liquidity is shrinking. We doubt that this will be for ever sustainable. The start of the Fed taper, in particular, might force the ECB to counteract with more liquidity. That could be the trigger for euro weakness.

The ECB is on hold ... for now


The ECB does not seem in a hurry to loosen its monetary policy
The European Central Bank (ECB) announced on 2 October that their monetary policy will remain accommodative for as long as necessary. However, comments from Mr Draghi did not suggest a forthcoming cut rates or that new unorthodox measures like the LTRO were ready to be launched. The perception that the ECB could remain longer on the sidelines, associated with the resolution of the recent Italian political gridlock, have lifted EUR/USD to new highs. However, the persistent low level of inflation, the fragile recovery, the decreasing level of liquidity in the Eurozone and the strong Euro are likely to trigger a new monetary stimulus from ECB in the next months.

Relative monetary policies less supportive for EUR/USD in 2014
The still questionable access to credit for small and medium enterprises (SME) in periphery countries and the increasing negative pressure coming from the strong Euro on exports could derail the current fragile recovery. Furthermore, the upcoming ECB's asset quality review of European banks is unlikely to lead to an increase in lending in the next few months. Also, the eventual US tapering is likely to push for higher borrowing costs globally, increasing the risk of derailing the Eurozone recovery. It seems therefore very likely that the ECB will eventually have to step in and loosen further the monetary conditions, potentially when the ECB will have a clearer view of banks' balance sheets.

Medium-term upside likely limited in EUR/USD
From a technical point of view, the key resistances are at 1.3711 (February peak) and 1.4000 (psychological level and long-term declining trendline). Given the respective monetary policies expectations and the increasing number of long Euro investors, we would not chase EUR/USD above 1.3711.

US government shutdown and the FX market

USD/CHF and USD/JPY are potential buying opportunities
We consider that an US default is very unlikely, therefore a deal is expected to be found before the unofficial deadline on 17 October. In such an event, a relief rally is expected that should lead to outflows out of safe haven currencies, leading to a decrease in value of the Japanese Yen and the Swiss franc. That decrease should be sustained by the persistent monetary policies conducted by the Bank of Japan and the Swiss National Bank. On the other hand, the US dollar is poised to rebound should a US default being averted. Therefore, USD/CHF and USD/JPY are prime candidates for a long position when the uncertainties will be lifted. The timing will likely be heavily linked to the resolution of the US political crisis. From a chart perspective and given that prices tend to anticipate events, a long strategy on USD/CHF and USD/JPY could also be favoured should they be able to move above a previous high. Currently, the resistances to monitor are 0.9078 (02/10/2013 high) in USD/CHF and 98.73 (01/10/2013 low) in USD/JPY.

RBA's wording more complacent on the Aussie

The RBA is waiting to see more effects of previous rates cuts
On 1 October, the Reserve Bank of Australia (RBA) decided, as widely expected, to leave rates unchanged at 2.5%. However, the wording concerning the valuation of the Australian dollar (not anymore described as "at a high level") and the persistent non-mention to any "scope for further monetary easing" suggest that the RBA could remain longer on the sidelines. Indeed, the rise in housing prices, one of the main beneficiary of the RBA's loose policy, tends to boost consumer confidence through the "wealth effect".

The rebalancing of Australian economy favours further RBA actions
In the longer term, we continue to believe that the end of the mining investment boom will lead to further below trend growth for Australia. Subsequently, the RBA will need to keep a loose monetary policy to help growth pick-up in the non-mining sectors.

High short GBP positioning has been erased

The International Monetary Market (IMM) non-commercial positioning is used to visualise the flows of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning.
With the US shutdown now in place, mounting uncertainties surrounding the debt-ceiling have pushed safe haven currencies, like the Swiss francs or the Japanese yen, higher. However, while the Swiss franc appreciation has been associated with investors adding long positions, the Japanese yen short positioning continues to move towards its historical extreme. We think that an eventual resolution of the debt ceiling issue should therefore act as a significant driver for a new phase of weakness in these currencies, especially the Swiss francs given investors long positions.

As expected, the Euro and the British pound have been bought after the FOMC meeting. The Euro long positions have exceeded their February peak and are now in territory where major tops have previously been made in EUR/USD. Therefore, even though we continue to favour a move towards 1.3711, a sustainable move higher is not warranted by Euro long positions.


The Australian dollar has seen some increase in its short positioning. However, the less dovish comments from the Reserve Bank of Australia on 1 October could lead to a closure of some of these short positions and fuelled short-term strength in AUD/USD.

2013/10/01

Weekly Forex Forecast - Week 40

Monetary uncertainty to weigh more than fiscal uncertainty

Federal Reserve uncertainty weighs on markets and the US dollar
One should not illude oneself: Mr. Bernanke's September 18 decision not (yet) to proceed with QE tapering reflects the serious concern that such move could still derail the recovery, based as it is on the highly interest rate-sensitive housing market. Inflation, furthermore, remains on historically low levels. On one hand this gives the central bank more room for manoeuvre. On the other hand, low inflation is an indication of the continuing deflationary threats in the economy, its threat to still high household debts, as well as the continuing weakness of the very recovery.

In this respect, we believe that the monetary policy concerns related to the QE tapering dilemma are more risky than the never-ending fiscal saga in Washington. At the same time, we concede that the combined effect of enduring uncertainty on both fronts could represent a major risk for the markets, over the next coming weeks. After all, if markets do not like uncertainty, they hate policy uncertainty. And, today, we are facing an unpleasant combination of monetary and fiscal policy uncertainty.

Labour market data key
September monthly job creation, more than the unemployment rate which is currently at 7.3%, will be important to give further clues about the strength of the economy and, consequently, the Fed's determination to pursue tapering. If the number would edge closer to 200k than to 150k, and if earlier in the week the purchasing manager figure (ISM) will remain above 55, it should be fair to expect some US dollar strength on the back of increased tapering prospects. If, on the other hand, the labor data would disappoint, the euro might further strengthen against the US dollar. And, this time, also equity markets would remain jittery.

Is Japan really on its way towards fiscal balance?

Japan is likely to take a first step towards more fiscal soundness
Mr Abe is expected go ahead with the first phase of the sales tax hike, implying a rise to 8% in April 2014 from the current 5%. The measure should be associated to a ¥5tn stimulus to cushion the blow on economic growth. Even though this is a first step towards balancing the budget, more steps should be taken to increase the odds of attaining this goal. In particular, the social welfare program needs to be revised and not only by raising the age of retirement, which was decided by the government before Mr Abe's. In 2011, the cost of Japan's welfare program was around 23% of GDP, which is in the average of the major economies. Sadly, Japan society is characterised by an aging population, which will lead to an inevitable increase in the cost of welfare. Therefore, should Abe fail to follow through courageous reforms in government spending, even an increase at 10% in October 2015 implied by the second phase of the sales hike is unlikely to be sufficient to balance the budget. Indeed, social welfare spending will reach a record ¥29.1tn this year while the government expect a yearly ¥13.5tn revenue with a tax at 10%. The resulting effect would be a loss of confidence among Japan's creditors, which could lead to upward pressures on government yields, leading to dire consequences for a country with a debt to GDP ratio of around 210%.

A technical overview on the Japanese Yen
As the Swiss franc, the yen has recently appreciated given its perceived safe haven status. However, we view this decline as temporary and we continue to expect EUR/JPY and GBP/JPY to hit their 2009 peaks (139.22 in EUR/JPY and 163.09 in GBP/JPY). USD/JPY is also attractive as it is close to a key support at 97.76 (see also the 200 day moving average) and that its longer term target lies between 105.50 (61.8% of the retracement of the decline from June 2007 peak) and 110.66 (August 2008 peak).

Uncertainties continue to weight on EUR/CHF

Uncertainties overshadow the recent EUR/CHF supportive news
EUR/CHF usually rises when investors are more risk seeker than risk averse. Therefore, the postponing of the tapering by the FOMC and the ongoing narrowing spreads in the Eurozone among core and peripheral countries should have lifted EUR/CHF. However, since the Fed decision to delay the start of the reduction of its liquidity injections, EUR/CHF has declined. This counterintuitive behaviour could be explained by the increasing uncertainties related to the US fiscal situation. Indeed, since the FOMC meeting, markets have focused on the threats implied by the short-term budget and the debt ceiling. Overall, the bigger risk lies in the debt ceiling as it is linked to the capacity of the US to service its debt.

The SNB continues to find the Swiss franc highly valued.
On the other hand, the Swiss National Bank reaffirmed on 19 September its commitment to defend a EUR/CHF floor at 1.20 and continues to consider the Swiss franc as highly valued. Given the lack of signs of inflation risk in Switzerland, we continue to see 1.20 as a credible backstop for EUR/CHF in the foreseeable future. Coupled with the potential mild recovery in Europe and the persistent global monetary accommodative policies among central banks, the medium-term outlook of EUR/CHF remains tilted to the upside.

Short-term uncertainties offer buying opportunities for EUR/CHF
Looking at the chart, EUR/CHF is moving below the key support at 1.2268 (06/08/2013 low). As the debt ceiling uncertainties could linger on until early November, it would be prudent to wait for the short-term uncertainties to be lifted before entering a long EUR/CHF. The way US lawmakers will manage the budget, and the potential government shutdown, is likely to give clues on the likelihood of a deal for the debt ceiling issue.

Long-term equilibrium broken in GBP/CAD

GBP/CAD is exhibiting an attractive technical configuration
The precepts of technical analysis mention that the upside or downside potential implied by technical patterns derives from two elements. The first component is the variation of the price inside the technical configuration or the height of the pattern. The second component is the time spent inside the technical configuration or the length of the pattern.

As a large pattern comes from wide price swings, the target is expected to be more significant as prices tend to offset the previous price extremes. Therefore, the greater the height, the bigger the potential target. Similarly, as a long pattern results of a persistent equilibrium between buyers and sellers, the break of this equilibrium is likely to lead to a significant move as many investors are wrongly positioned and have to close their positions, adding fuel to the new trend. Hence, the longer the pattern, the bigger the potential target.

Looking at GBP/CAD, the bullish breakout of the resistance at 1.6474 (26/08/2010 high) put an end at three years of consolidation. Given the length of the pattern (called a rectangle), we can expect a long-term rise in GBP/CAD. The height of the pattern (0.1225=1.6474-1.5249) implies a minimum target at 1.7699 (0.1225 added to 1.6474). Given the resistance at 1.7934 (09/11/2009 high), the minimum upside potential could be even pushed a little bit closer to that level. Furthermore, even if the September 2009 peak should be hard to break, the extended time length of the consolidation suggests that a move towards the next key resistance at 1.9304 is far from unlikely.
With a stop-loss slightly below the support at 1.6174 (28/08/2013 low), the minimum risk/reward ratio is above 2.5, which makes a long GBP/CAD position attractive for the medium- to long-term time horizon.

High short GBP positioning has been erased

The International Monetary Market (IMM) non-commercial positioning is used to visualise the flows of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning.

Except the Japanese yen, all currencies have been bought during the week ending on 17 September. The side-effect is an overall reduction in long USD positions. As the FOMC took place on 18 September, it is safe to assume that more of this erosion in long USD positions has occurred.

In particular, investors have almost closed all their short positions in GBP. Given the neutral readings, any rally in the British pound will not be lifted by GBP positioning. Investors have increased their long position in Euro back to levels seen in February 2013. The ongoing reduction in Eurozone liquidity could lead to a further increase in the long positioning. Finally, commodity currencies have recently experienced a reduction of their short positions. Further closings of short bets could lead to a longer appreciation in these currencies in the short-term, especially the Australian dollar which has recently broken its strong resistance at 0.9345.


2013/09/24

Weekly Forex Forecast - Week 39

Gradual improvement fosters deadlock in the eurozone

How come the euro is so resilient?
In the next pages we explain how the euro could further strengthen against the US dollar in the coming weeks, even months. The arguments for such further strengthening are both technical and fundamental, in particular the continuing divergence in monetary policy with the ECB's balance sheet shrinking, whereas the Federal Reserve sticks to QE.

Solving the euro conundrum
LTRO repayments by the banks imply a reduction of outstanding liquidity. What is more important, such reduction has not prevented a gradual improvement of business confidence and the old continent is therefore soon expected to move into, albeit very modest, positive growth territory. This improvement is not spectacular and "normal" after the reduction of fiscal pressure in the two larger periphery economies, Italy and Spain.

Bad news means action, no news means deadlock
Yet, this modest economic stabilisation is enough to ensure that no major action from the ECB is to be expected over the next months. Indeed, both the LTRO and the OMT were announced under pressure and in agreement with the German government. Pro-active, instead of reactive, unconventional monetary policy is not yet part of the ECB's operational handbook. As a result, the ECB's balance sheet could continue to shrink and, as long as the Fed does not embark on effective and significant QE tapering, upside pressure on the euro could persist. If, however, the global economic situation would unexpectedly deteriorate, for example because of the US congress not agreeing on fiscal policy, spreads could re-widen, political instability in the Spain and Italy could again become relevant, and the euro would again come under pressure, even before the Federal Reserve finally embarks upon its tapering intentions.

The FOMC meeting confirms an ultra accommodative Fed

A longer dovish Fed is hurting the bullish case for the US dollar
Mr Bernanke surprised the market on 18 September by postponing the tapering process. Notwithstanding the US dollar decline following the announcement, the dovish commitment by the Fed is expected to have further medium-term effect on the greenback. The continuation of the full monthly $85 bn liquidity injection by the Fed and the concerns about the tightening of financial conditions highlighted by the FOMC suggest a significant slower tapering process than previously hinted by Mr Bernanke in June. Indeed, the tapering seems now unlikely to start in October as the Fed will only have one month more of data to assess if the recovery is strong enough to sustain a reduction in liquidity injection. Moreover, the uncertainties linked to the US debt ceiling are also suggesting that the Fed could wait until December before tapering. Furthermore, the likely nomination of Mrs Yellen as the new Fed chairperson strengthens the stance of an ultra accommodative Fed. One could also speculate that the more dovish stance reflects the prospect of a forthcoming Yellen nomination. On the other hand, the European Central Bank (ECB) is still passively removing liquidity through the LTRO repayments. This increasing gap, which could persist for longer than expected in the light of the September FOMC meeting, is supportive for EUR/USD. In the UK, this supportive effect should be less significant as the liquidity remains unchanged through the decision of the Bank of England. Overall, even though the US dollar could receive some short-term support from a potential escalation in the debate surrounding the debt-ceiling, the persistent divergence in liquidity across the Atlantic should remain a supportive factor for EUR/USD in the next few months. In the longer term, we remain convinced that the US is more advanced in the tightening cycle, which should eventually favour a sustainable rise in the USD. However, the recent developments suggests that this time is farther than previously thought.

A technical update on forex after the FOMC decision

EUR/USD is breaking its summer peaks...
The surprise move by the FOMC has had a significant impact on the Forex market. Cyclical currencies like the EUR and the AUD have significantly appreciated against the USD following the news. EUR/USD has broken its summer peaks at 1.3417 (19/06/2013 high) and 1.3452 (20/08/2013 high), opening the way for a test of the annual high at 1.3711 (01/02/2013 high) and potentially its long-term declining trendline around 1.40. Even if we do not expected this move to be made in a straight line, the mediumterm prospects are now tilted to the upside. AUD/USD is also benefiting and broke its strong resistance at 0.9345. The technical configuration favours a further short-term rise towards 0.9666 (14/06/2013 high), possibly 0.9843 (21/05/2013 high). However, a bigger upside is unlikely given the long-term distributive phase that has taking place since mid 2011.

...while the yen is weakening
Even though the initial move from USD/JPY was on the downside, the annual highs posted by EUR/JPY and GBP/JPY are positive and confirm a global bearish stance on the yen. It is true that major resistances in these pairs are looming (EUR/JPY: 139.22, GBP/JPY: 163.09), which calls for caution, especially as the yen is extremely shorted among investors (see page 7). However, USD/JPY, with its potential symmetrical triangle and its major resistances around 105.50 (61.8% retracement from the decline from June 2007) and 110.66 (15/08/2008 high), suggests that the yen could weaken further in the medium-term.

Mr Summers' exit reduces uncertainty of future Fed's policy

Democrats support Mrs Yellen to be new Fed chair(wo)man
The lack of support for Mr Summers among democrats, especially in the Senate Banking Committee, has forced him to withdraw his candidacy for Fed chairman. Indeed, with four democratic senators openly against Mr Summers and given the thin democratic majority in the Committee (12-10), Mr Obama would have had to rely on Republicans to back Mr Summers' nomination. A too difficult prospect given the looming confrontations with Republicans around the budget and the debt ceiling.

New chairman expected to follow Bernanke's monetary stance
Even though a new candidate could still be chosen by Mr Obama, the future Fed chairman is likely to be either Mrs Yellen (highly likely) or Mr Kohn. Both have served as vice-chairman for Mr Bernanke and share his view on the monetary policy, so the continuity in the Fed's commitment to keep interest rates low is increased, strengthening the credibility of the Fed's forward guidance. A nomination of Mrs Yellen would likely lead to further transparency and clarity in the Fed's communication, reducing uncertainties in the Fed's monetary policy. Furthermore, her nomination would strengthen the Fed's determination to fight high cyclical unemployment even if that would lead to potential temporary overshoots in inflation.

Implications for the Forex market
The withdrawal of Mr Summers was negative for the US dollar as he seemed less inclined to leave rates as low as Yellen's "lower for longer". Now that the market has mostly discounted a Yellen nomination, we would see any other choice than Mrs Yellen herself or Mr Kohn (at the limit a return of Mr Bernanke) as rather bullish for the US dollar, as it could potentially weaken the forward guidance put in place over the last year.

Short JPY positions are edging towards historical extremes

The International Monetary Market (IMM) non-commercial positioning is used to visualise the flows of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning.

No real changes, again, in the week ending on Tuesday 10 September.

The Japanese yen short positions have reached a 5 year record at -48.23% and are edging towards the historical extreme made on June 2007 at -53.39%. Given this large pool of sellers and the strong resistance in many yen crosses (110 in USD/JPY, 139 in EUR/JPY and 163 in GBP/JPY), it is difficult to call for an aggressive medium-term bearish view on the yen.

The Australian dollar remains also heavily shorted, representing potential fuel for a further short-term rise. Therefore despite the recent sharp rise, we remain a short-term positive bias on AUD/USD as a risk of a further spike higher remains significant. However, we continue to see this rise in AUD/USD as a counter-trend move within the underlying medium- to long-term downtrend.

The British pound remains attractive due to its relatively high short positioning. However, the GBP appreciation has by now priced in most of the surprises caused by the strong economic data from UK and the lessthan-expected dovish stance from the Bank of England. Furthermore, on a 12 month horizon, the BoE is expected to be the second most dovish major central bank, only behind the Bank of Japan.

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