Short EUR/USD (From 18-Oct to 23-Oct)
Real-Time AmpGFX – squaring short EUR and NZD positions (Tue 10/23/2018 4:50 AM MT)
Bought one unit EUR at 1.1475
Bought one unit NZD at 0.6563
Comment
At risk of appearing indecisive, I have decided to close both short positions in NZD and EUR.
Price action has un-nerved me, with the broad weakness in the USD, and fall in US bonds yields in offshore trading.
The FX and rates market appears to be mainly in position-squaring mode. While safe haven demand might normally support the USD, the first move may be towards cutting all positions which are generally USD long. This could be reinforced by a deeper fall in US rates on thoughts the Fed may halt rate hikes or even reverse them in a stock market rout that extends more clearly to the USA.
China is moving into all-out stock market stabilization, and while this may be a reflection of deep underlying problems, in the first instance it could also encourage squaring USD long positions, including against the CNY.
Risk aversion has not spread to Euro-periphery bonds that are modestly out-performing German yields on Tuesday; another sign that the market is squaring all positions.
We had thought there may be more of a focus on fundamental problems in Europe and China. However, the risk is that the market turns to worry about contagion to the US economy and lower US rates.
Uncertainty is generally quite high, and position-squaring may simply dominate in FX and rates, while equity investors may retreat to cash. The pressure may be more on US economic reports and earnings to beat expectations.
Real-Time AmpGFX – Sold EUR/USD (Mon 10/22/2018 9:40 AM MT)
Sold one unit of EUR/USD at 1.1471
Comment
We have returned to our short EUR/USD position this week after deciding to square up on Friday, fearing an end-week market squaring correction.
The EUR continues to trade on the back of Italian govt budget developments. The market has absorbed a gentler tone from EU and Italian leaders, and Moodys rating decision, but Italy intends to press ahead with its current higher budget deficit funding social spending programs that are unlikely to be viewed as fiscally responsible.
They may not trigger any sanctions or further spread widening, at least immediately, but a higher risk premium is likely to be retained in Italian bonds, and it may widen further in coming months now that the ECB has tapered purchases of bonds to EUR15bn, moving to zero purchases from January.
As mentioned last week, the real 10-year yield spread between the US and the EU has widened significantly in favour of the USD, and 3mth FX fwd carry for the USD has increased to a record. The EUR should fall on these factors even if the Italian budget issue does not worsen
Uncertainty around UK politics and Brexit negotiations have increased on Monday, and maybe dragging down the EUR. There is a risk that this improves and supports the EUR.
The Euro data this week is likely to be weaker and support the case for a weaker EUR, including flash PMIs on Wednesday.
There has been significant volatility around Draghi press conferences in the last year, and this poses a risk for any position in the EUR. He has the potential to cause significant movement in the tone that he sets. He was seen to be optimistic in recent meetings, emphasizing rising wage growth trends. It’s possible that he again causes a squeeze of short positions by emphasizing the positive and downplaying the contagion fears from Italy.
However, we see the risk building that contagion from Italy, Brexit and broader global uncertainty is increasing, especially as the market contemplates the end of ECB QE.
Position
Short one unit EUR/USD at 1.1471; s/l 1.1523; t/p 1.1323 (Capital at risk 0.47%)
Real-Time AmpGFX – Bought to close short in EUR/USD, positive EU comments on Italy (Fri 10/19/2018 8:07 AM MT)
Bought EUR/USD at 1.1491 to close short position
Comment
We are reading the supportive comments by EU official Moscovici towards the Italian government and budget process. This would explain the rebound in Italian bonds.
We were more inclined to hold the short EUR/USD position in light of the rise in US yields. However, given it is Friday, equity markets may be in rebound mode, and the market may be in a mind to square short positions, including the EUR/USD, we decided to close this position too and look at it again next week.
We are square.
Real-Time AmpGFX – Sold EUR/USD (Thu 10/18/2018 8:06 AM MT)
Sold one unit of EUR/USD at 1.1494
Comment
Periphery spread widening has broadened to Spain.
US real long-term yields have increased significantly in the last month,
3mth Xccy swap spreads have blown out significantly increasing the cost of long EUR/USD positions.
The chance of a breakthrough on Brexit negotiations has decreased.
Euro economic reports have remained sluggish since mid-year
EUR may be establishing a clearer downtrend
Positions
Long one unit AUD/NZD at 1.0895; s/l 1.0773; t/p 1.1043 (capital at risk 0.76%)
Short one unit EUR/USD at 1.1494; s/l 1.1558; t/p 1.1358 (capital at risk 0.58%)