Forex Institutional Research: Societe Generale FX Daily
Key quotes from the Societe Generale report:
Position data offer at best an incomplete and murky picture of what’s going on, but the CFTC futures report for last week shows the net USD long fell further, at the same time as the net 10yr Note position’s uptrend continued. The bond story’s interesting because speculators are buying at the same time as TIC data show hedge fund buying offsetting the pull back from the market by central banks’ reserve managers. The dollar peaked at the end of January, two months ago, just after CFTC data started to show longs being cut back and I can’t see the dollar rally resuming without help from (rising) Treasury yields.
That really just reflects the fact that with the scope (or appetite?) on the part of other central banks to weaken their currencies limited, the key is what the Fed does and how the US economy performs. So, at the start of a week that will be dominated by Friday’s payroll report, and after yesterday’s softish 1.7% core PCE deflator, all eyes today are on Janet Yellen who is speaking at the Economic Club of New York at 12:20 pm ET. The danger is that she is very balanced/neutral. It’s hard why she would seek to signal the possibility of an imminent rate hike after recent data, but she will clearly want to support the market in pricing-in hikes this year. Net result, she won’t be much help and we may wait for Friday for economic clues. My underlying view though, is that while a trundling US economy and a slow-moving Fed make new highs for the dollar unlikely any time soon, we are now in a range for the currency and for that matter in 10-year yields. I’m not instinctively a big buyer of volatility here,
USD March Softness
The dollar has been soft in March, but it’s the yen that has been the weakest of the major currencies. It’s not a dramatic move and its’ had enough twists and turns to thwart me, but it continues to normalise after the rally in January. This morning’ February data saw the unemployment rate edge up to 3.3% from 3.2%. Both tomorrow’s industrial production and Friday’s Tankan are likely to be soft. Pressure for fiscal easing will build but I can’t see anything that is going to make me bullish f the yen and a return to USD/JPY 120 is still perfectly possible, even if happens at snail’s pace.
European Money Supply
European money supply data this morning are likely to be either ignored, or used as a reason to buy the Euro. We expect M3 growth to pick up to 5.1%and private sector credit growth to edge up from 0.9% to the dizzy heights of 1% per annum (or even 1.1%?). not fast enough to change anyone’s underlying view but it’s enough to keep EUR/USD in its range.
There is no data in the UK but if the FPC does announce a little macro-prudential tightening, that will just keep the need for rate hieks even further away. ‘Brexit’ trundles on but sterling sentiment is bad enough that it needs a steady flow of bad news to sustain it and I can’t really se much on the horizon today or this week, though the Q4 current account data on Thursday are going to focus attention back on the deficit.
With the oil bounce universally-declared as due to short-covering more than great fundamentals and other commodities mixed, while central banks are on the sidelines, where does that leave FX trends overall? We want to stay long oil-sensitive currencies vs. those sensitive to China and non-oil commodities, so sort EUR/RUB, short GBP/NOK and short NZD/CAD remain themes we like. I gave up writing about the Swedish krona for Lent but Easter’s past and long SEK/JPY is a trade I like here (still) and can now reasonably re-engage with.
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