Conditions supporting risk trades have actually improved - ironically as the USD fights back a bit in today's action. What gives?
Our measures of risk appetite have improved sharply since late last week, mostly as FX volatility has improved since the spike last week ahead of nonfarm payrolls, but also as the VIX has plumbed new lows since April and as corporate credit default spreads were generally more complacent about default risks. This should theoretically be supportive of carry trades, particularly with the US short end of the curve spiking to new record lows of a mere 34 bps on Friday and today. But the greenback was a bit stronger, perhaps as interest rate spreads (despite the record low in US rates) haven't moved against the USD's favor today, though they can only be described as a tick or two from flat in most cases.
Chart: Saxo Bank Carry Trade Model
The faster carry trade index is showing more support for the move lower in the USD in general after FX volatility has eased rather sharply since Friday and especially on the huge drop in the VIX to new lows since April. For the USD to make a comeback, we have to either find a way to explain how the old USD/risk appetite correlation paradigm is ending (despite recent divergences, we doubt that this is the case), or we need to see significant signs of worries developing in asset markets.
The faster carry trade index is showing more support for the move lower in the USD in general after FX volatility has eased rather sharply since Friday and especially on the huge drop in the VIX to new lows since April. For the USD to make a comeback, we have to either find a way to explain how the old USD/risk appetite correlation paradigm is ending (despite recent divergences, we doubt that this is the case), or we need to see significant signs of worries developing in asset markets.
Chart: GBPUSD vs. interest rate spreads
We've got some key comparable data coming up here in the UK and the US this week. A leading UK housing survey is up tonight from the UK, the UK CPI data is up tomorrow and the UK trade balance number is out on Thursday. Meanwhile, the FOMC minutes are due from the US tomorrow, the US trade balance figure for August is also due on Thursday and the US CPI is due on Friday after the PPI data Thursday. With GBPUSD trading near the key 1.60 resistance level, the action in GBPUSD could be volatile this week. Interest rate spreads suggest room for further appreciation from GBPUSD relative to the past peak in spreads in early August, but the recent rhetoric on QE from the BoE's Posen and the possibility of more to come from other BoE officials is a significant downside risk for GBP, not to mention the economic data. An important question is whether the BoE's and market's QE assumptions are altered if the UK CPI level remains stubbornly above 3.0% for more than another month or so.
We've got some key comparable data coming up here in the UK and the US this week. A leading UK housing survey is up tonight from the UK, the UK CPI data is up tomorrow and the UK trade balance number is out on Thursday. Meanwhile, the FOMC minutes are due from the US tomorrow, the US trade balance figure for August is also due on Thursday and the US CPI is due on Friday after the PPI data Thursday. With GBPUSD trading near the key 1.60 resistance level, the action in GBPUSD could be volatile this week. Interest rate spreads suggest room for further appreciation from GBPUSD relative to the past peak in spreads in early August, but the recent rhetoric on QE from the BoE's Posen and the possibility of more to come from other BoE officials is a significant downside risk for GBP, not to mention the economic data. An important question is whether the BoE's and market's QE assumptions are altered if the UK CPI level remains stubbornly above 3.0% for more than another month or so.
Chart: USDJPY
Interesting to see the strong dip and retrace in USDJPY overnight. This would be a typical bullish reversal if we see a bit more upside into the close, but not one that is necessarily supported by interest rate spreads just yet, though these failed to head lower today. Tomorrow's FOMC meeting minutes will obviously have a bearing on whether the pair have put in a low for now.Note that the last several hammer-like reversals have only served to indicate relatively brief consolidations in the overall bear market.
Interesting to see the strong dip and retrace in USDJPY overnight. This would be a typical bullish reversal if we see a bit more upside into the close, but not one that is necessarily supported by interest rate spreads just yet, though these failed to head lower today. Tomorrow's FOMC meeting minutes will obviously have a bearing on whether the pair have put in a low for now.Note that the last several hammer-like reversals have only served to indicate relatively brief consolidations in the overall bear market.
Chart: CFTC positioning report from Friday for JPY
The positioning picture is interesting - here we see the US COT reports showing the positioning of speculators as of last Tuesday. Note that we are close to record net positioning levels on the long side in JPY (also note that this is a JPYUSD chart as the future also trades in JPY vs. the USD.).
The positioning picture is interesting - here we see the US COT reports showing the positioning of speculators as of last Tuesday. Note that we are close to record net positioning levels on the long side in JPY (also note that this is a JPYUSD chart as the future also trades in JPY vs. the USD.).
Chart: CFTC positioning report from Friday for EUR
The positioning picture for EURUSD is particularly interesting: market participation (open interest) was very high on the downside, but has continued to contract sharply despite the recent aggravated uptrend and shift to outright long positioning in the market.
The positioning picture for EURUSD is particularly interesting: market participation (open interest) was very high on the downside, but has continued to contract sharply despite the recent aggravated uptrend and shift to outright long positioning in the market.
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