Rates as of 05:40 GMT



1. Buy AUD/USD on expectations of profit-taking on the sharp move
2. Sell CHF/JPY as risk aversion means another challenge to the 108 line is likely
3. Sell GBP vs USD or EUR as speculators have become overly confident that there won’t be a “hard Brexit”


Market Recap

As usual, the US-China trade dispute is what’s moving the market today. Typical risk-off movement. The Shanghai stock market is down 1.6% at the time of writing, Tokyo is off 0.6%, and it’s no surprise that CHF and JPY are doing well and AUD and NZD aren’t.

AUD may also have been hurt by a drop in iron ore prices. The commodity fell in Singapore trading as much as 1% during Asian trading on fears over the China trade talks. But as of the time of writing it’s down only 0.14%. Furthermore, in Chinese trading, the Dailin iron ore futures are up 1.78%. I think there’s likely to be some profit-taking on the sharp decline in AUD today and I expect AUD to recover somewhat today. However I’d be careful on this one, because it looks like the US-China trade talks are indeed running into trouble. Putting on this position requires watching the screens closely.

What’s curious to me about today’s action is that CHF beat JPY, which hasn’t been the case for a long time. The graph below shows the daily change in USD/CHF vs the daily change in USD/JPY since the beginning of 2018. They’ve moved in the same direction 69% of the time over that period, but as you can see, generally USD/JPY moves more than USD/CHF. Meaning that when they both rise, CHF/JPY should in theory fall.

My guess is that this is technical – CHF/JPY also bounced off this 108 line back in April 2017. I don’t see why this should be the case however; I think Japanese are likely to continue to be more risk-averse than Europeans, given the threat that the worsening US-China trade dispute (and the US-Japan trade dispute, for that matter) represents to them. Therefore I expect another challenge to the CHF/JPY 108 line and would expect it to break.

The Commitments of Traders report (see below) shows that speculators are already fairly short CHF, but historically they have been shorter – I don’t think positioning will be a major obstacle.


Commitments of Traders report

Not much change in speculators’ positions.

As mentioned above, speculators are fairly short CHF, but fund managers aren’t, as measured by the Citi “FX Pain” positioning index. Furthermore, speculators have been more short (shorter?) in the past. And in any event, the positions are fairly small relative to those in other currencies, although admittedly liquidity in CHF isn’t as great as that in other currencies.

Speculators added a lot to their short GBP positions in percentage terms, but in absolute amounts they’re still relatively flat. It amazes me that the short positions aren’t greater. As hopes for an early settlement – or indeed any settlement at all -- to the Brexit debate fade, I’d expect renewed bearishness towards GBP. All the more so now as Nigel Farage’s new Brexit Party campaigns for the EU election, raising the volume level and encouraging “Brexit at any cost” sentiment.


Today’s market

Not much on the schedule for today – only the Japan current account balance coming out overnight. That’s likely to show an increased surplus on an NSA basis, but after seasonal adjustment, it’s actually supposed to be lower. The market watches the NSA figure however so look to see how the actual for that compares with expectations.

Actually, I think the effect of any risk-on, risk-off move today is likely to be more important for JPY than this indicator, so I’d watch the stock markets more closely.


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Marshall Gittler

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