Sunday, October 16, 2016

Kit Juckes at SocGen: Sunday Evening FX Musings

From Across the Curve:
Via Kit Juckes at SocGen:

Two Sunday evening links. One from Michala on the economics of bond yields and one from me on why the Euro looks vulnerable this week.
Euro and T-Note positions – room to break EUR/USD lower

For once, the most interesting data in this week’s CFTC (FX) position report wasn’t how short everyone is of sterling, but a renewed build-up of Euro shorts. OK, in the 5-eyar chart below you can see that it’s not a huge increase, but maybe that’s part of the point too. EUR/USD closed the week below 1.10, in part after Boston Fed President Eric Rosengren suggested that if the Fed were concerned about historically low 10-year yields, the composition of the Fed’s balance sheet could be adjusted to steepen the yield curve [(see here):]. Mr Rosengren did nothing to dissuade the market from the idea that a rate hike is coming in December unless something happens to de-rail a move (again) but equally, he didn’t seem very hawkish beyond that.
The market has room to get shorter Euro
Mr Rosengren is helping the Treasury correction continue, adding to the angst among Treasury holders and if the market shows a growing Euro short, it also shows a shrinking T-Note future long. But a smaller long is still a long and the tide has turned in bond-land. There’s plenty of data in the week ahead and the balance of risks is for higher yields, and a weaker Euro. If you’re into Euro-gloom, Ambrose Evans-Pritchard cited this article<,18a21a46,18a21a49> by Otmar Issing today, but I’m more interested in the widening yield gap, the Treasury bear market, the psychological break below EUR/USD 1.10 and the positioning (still a small Euro short and still a net T-Note long). All of which suggests that we can see a move to 1.08, perhaps a little below, but positions and small relative yield moves aren’t really enough to get a move to, say, 1.00-1.04

And it has plenty of room to get nervous about Treasuries...