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In the following article, based on the Commitments of Traders report, I deconstruct last week’s change in futures and options positioning. Note, notwithstanding the insights one can obtain in the data from Aug 29th to Sept 4th, in this week’s analysis, I also emphasize the consequences in market positioning following what might have been a watershed moment to re-price a more aggressive Fed tightening cycle heading into 2019, as the latest CoT data still doesn’t capture these changes until next Friday.
In a nutshell, the psychological break of 2.8% y/y in US wage growth, as part of yet another strong US NFP number last Friday, especially if backed up by a positive US CPI on Thursday, should constitute the stroke that breaks the camel’s back in terms of renewed macro interest towards the US Dollar.
The latest data, up to Sept 4th, was fairly inconclusive, except in the Australian dollar market, which was unambiguously bearish. After the US NFP on Friday, we can now safely assume that some of the bearish USD positioning that was being built, as is the case of a rather bullish EUR report, will now have to be re-assessed, which may lead to potentially trap wrong-sided EUR longs (DXY shorts) ahead of next Thursday’s ECB meeting, when all the bets will go off and the euro’s next direction will be determined by policy outcome.
Meanwhile, the current dynamics in the sterling and Japanese yen markets, one driven on a Brexit headline-by-deadlines basis, and the other as a function of risk-off flows, makes the anticipation of a potential directional bias not as convincing. However, it definitely suggests that positive GBP, JPY flows will struggle to make as much progress, as a re-allocation of capital is expected to join the US Dollar bandwagon in anticipation of a more hawkish Fed.
Barring any major shocker in the trajectory of the US economy, or a rather unexpected positive resolution in the US vs China trade war, the conditions look set for the USD to benefit against G4 FX, although some nuances must be duly noted. Against the Australian dollar, marginal rebound sequences as well as extended in nature should continue to find committed sellers at regular price intervals, making a sell on rallies the preferred strategy. Selling strength in the euro vs US dollar is also expected up until Thursday’s ECB policy meeting when a general re-assessment of the euro attractiveness will ensue; however, judging by the positioning of the market ahead of the US NFP, the euro is still seen as quite an attractive proposition although trapped buyers may suffer near term. The sterling and the yen, when all factors considered, should see the directional bias skewed towards the downside against a stronger US dollar, even if I must emphasize that the risks of being whipsawed on political events (GBP) or risk sentiment (JPY) remain elevated.