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.

<http://www.sgmarkets.com/r/?id=h1188ae10,18a21a46,18a21a47&p1=136122&p2=3ac2afd229b864222aa934befde45602>

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): https://www.bostonfed.org/news-and-events/news/top-takeaways-oct-14-economic-conference-remarks.aspx]. 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

[http://email.sgresearch.com/Content/PublicationPicture/234156/1]

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<http://www.sgmarkets.com/r/?id=h1188ae10,18a21a46,18a21a49> 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...

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