Thursday, February 4, 2016

"Great Unwind - 'Long' Dollar Positions Recalibrate"

Recalibrate, yes that's one way to put it.
I suppose you could also say that on the trip back from Moscow Napoleon was just recalibrating.

From Action Forex:
The mighty dollar has been the darling of the forex market for 18-months now, mostly on rate differentials. But has the Fed got it right?

So far this year, and after the first Fed rate hike in nine-years last December, the U.S fixed income market continues to price in a Fed policy error. Dealers see one, maybe two Fed rate hikes, and not the four that U.S policy makers are leading the market to believe. Weak U.S data is key, as the U.S is being considered the consumer of last resort.

The USD has come under immense pressure this week, down just under -2% against its major counterparties in Wednesday trading alone. The unwinding of 'long' dollar positions ahead of Friday's non-farm payroll (NFP) is giving some significant support to GBP, AUD, NZD and CAD, but to varying degrees.

This coupled with some relatively upbeat U.K data this week has sterling printing three-week outright highs (£1.4655). Wednesday's stronger than expected UK services PMI is currently sparking talk that the market is overpricing Bank of England (BoE) rate cut risks.

Sterling (£1.4650) has been supported by some upbeat economic data; Aussie (A$0.7225) is finding some rate differential appeal, the Kiwi (N$0.6712) seems to have dismissed this weeks disappointing GTD price action and jumped as New Zealand jobless rate tumbles (-0.9% to +5.3%), while Canada's loonie (C$1.3683) remains handcuffed to the price of a barrel of crude and some M&A activity interest south of the 49th parallel.

Oil price volatility and concerns over global economic growth continues to be the most dominant of market focus. U.S data this week (ISM and Markit services ISM data has undershot expectations) is raising real fears the economic slowdown is spreading. The Feds normalization rate path is becoming more complicated by the actions of other central banks (ECB's and BoJ NIRP) and this alone will lend support to currencies whose economies show some or any traction.

Wednesday's massive USD unwinding has seen GBP (old resistance - £1.4450-1.45), AUD (A$0.7050-0.7100), NZD (N$0.6550) and CAD (C$1.3900) blow right through key resistance levels.
Not making it any easier for investors is that February is an "air pocket" for central bankers.
Investors will have to go it alone this month. Despite February being the shortest calendar month of the year it could feel a rather long one with no directional guide from any of the major central bankers (the BoE do meet this Thursday morning).

The next five weeks lacks a single scheduled opportunity for the Fed, ECB or Bank of Japan to reset monetary policy. Yen is now stronger than when Governor Kuroda introduced his NIRP last Friday. With the lack of direction, investors could be exposed to even more volatile moves especially if there is any further slide in commodities and evidence supporting China's economic slowdown-data already this week indicates that China's manufacturing remains in contraction.

Friday's non-farm payroll (NFP) number will be big, not the number itself (consensus is looking for +180k print), but the significance and impact that it could have on the market....MORE