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ABN Amro - Global FX Daily
Weekly CFTC/IMM statistics signal a reduction in the carry trade:
The report shows IMM non-commercial or speculative positions from Tuesday 07 August. The report showed a further reduction of interest in FX carry trades. Carry trades in JPY, CHF, AUD, MXN and CHF were all reduced in what appears to be a further step away from risk following the prior week’s big de-leveraging of speculative positioning in FX and other asset classes.
As a consequence, the IMM’s concentration of speculative positions in EUR-USD has grown more extreme, with 32 percent of the IMM’s speculative bets concentrated in EUR-USD. Speculative open interest fell another $1bn to $76bn, which is a 4-month low.
On overnight events and the outlook for continued risk reduction:
In Asian FX, yuan weakened versus USD in part due to remarks by an unnamed PBoC official noting how USD assets formed an important part of China’s foreign exchange reserves, as “the dollar enjoys a major position in the international monetary system.” Meanwhile, China’s CPI soared to the highest level in 10 years. CPI rose 5.6% y/y in July fuelling speculation that interest rates may need to be raised for a fourth time this year. There does seem to be an overall sentiment in the market that the credit problems from last week may worsen before they get can better. The risk of further risk reduction continues to drive currency markets, and thus larger corrections in high yield currencies are likely and the rebound in JPY is likely to continue.
Barclays Capital - Global FX Daily
Barclays also expects current market uncertainty to persist. However, unlike UBS and ING, Barclays’ view is that the USD is unlikely to benefit from continued market turbulence:
Prior to the money market issues of last week, a sequence of monetary policy pronouncements by major central banks suggested broad agreement that prospects were reasonably bright. Following the turbulence at the end of last week though, it is difficult to know quite how policy makers are likely to respond, which is adding to an already extremely uncertain picture. We think that financial market concerns will probably persists, in the short run at least, and that investors are likely to continue to move towards more defensive positions in their portfolios in the near term. As discussed in the FX Weekly Brief, the relationship between equities and exchages rates suggests that the NZD, AUD and NOK are the most vulnerable to continued equity weakness, whereas the JPY and CHF will be the obvious beneficiaries of risk reduction. The USD however is unlikely to appreciate if market turbulence continues. In fact, we think it is vulnerable to growing risk of increased home bias and the possibility that the fallout of the subprime problem will further delay the recovery of the US housing market.
Dresdner Kleinwort - FX Compass
Looking to the week ahead, DK expects economic fundamentals to remain in the back seat:
With the VIX trading at a 4Y high, the S&P 500’s market cap down USD 1.14trn since July 19 and the market pricing in a significant risk of an inter-meeting Fed rate cut, interest in economic fundamentals will be limited this week.
Nevertheless, if today’s US retail sales were to disappoint, investors would immediately see this as a proof that unfolding events in the housing market are finally hitting consumer spending; more risk aversion could be the result.
However, market interest may focus even more on the NAHB index and housing starts (Wed/Thurs) with USD risks being once again asymmetrically biased to the downside as positive data surprises will most likely be ignored.
Wednesday’s US inflation data should neither be a much of a factor for the USD sentiment even if CPI was to surprise to the upside. In the past high inflation has never been an argument for the Fed to delay rate cuts if needed.
While this leaves some upside risks to EUR/USD, the discussion whether the ECB will hike rates in September is in full swing with the market revising expectations for a 25bp hike to 50% from 90% at the start of last week. Any signs that EU13 growth momentum is slowing would only support such revisions although we suspect that in the current environment this will not affect the EUR crosses.
UBS - Morning Advisor Europe
Looking for safe haven/risk reduction flows to benefit the USD:
… weakness in credit conditions amongst financial institutions globally cannot be ignored. Further news of large exposures to subprime derivates and other non-performing asset-backed securities are likely, keeping money-market rates high and central banks will be ready to step in to restore order. Although our FX Risk Index has remained in extreme risk-averse territory for some time now the lack of carry unwinding beyond key levels and the stagnation in safe-havens despite equity market volatility suggest investors are not willing to bail out on growth yet. The erosion in home bias, especially in the US, over the last few years has allowed unprecedented amounts of funds to be invested in overseas assets to capture growth in both emerging markets, and recovering economics such as Japan and the Eurozone. The reversal in benign conditions has been sudden which may explain significant investor scepticism and lack of liquidation and repatriation. However, we believe last week’s events set the stage for a brisk-paced decline in overseas holdings by US investors, especially now that portfolios will be under greater scrutiny when access to credit is being sought. In addition, if signs of damage in the real economy across G10 emerge at a time when certain developing economies are showing signs overheating, broader demand for high-quality US assets as a safe haven can only increase from current levels.
Weekly CFTC/IMM statistics signal a reduction in the carry trade:
The report shows IMM non-commercial or speculative positions from Tuesday 07 August. The report showed a further reduction of interest in FX carry trades. Carry trades in JPY, CHF, AUD, MXN and CHF were all reduced in what appears to be a further step away from risk following the prior week’s big de-leveraging of speculative positioning in FX and other asset classes.
As a consequence, the IMM’s concentration of speculative positions in EUR-USD has grown more extreme, with 32 percent of the IMM’s speculative bets concentrated in EUR-USD. Speculative open interest fell another $1bn to $76bn, which is a 4-month low.
On overnight events and the outlook for continued risk reduction:
In Asian FX, yuan weakened versus USD in part due to remarks by an unnamed PBoC official noting how USD assets formed an important part of China’s foreign exchange reserves, as “the dollar enjoys a major position in the international monetary system.” Meanwhile, China’s CPI soared to the highest level in 10 years. CPI rose 5.6% y/y in July fuelling speculation that interest rates may need to be raised for a fourth time this year. There does seem to be an overall sentiment in the market that the credit problems from last week may worsen before they get can better. The risk of further risk reduction continues to drive currency markets, and thus larger corrections in high yield currencies are likely and the rebound in JPY is likely to continue.
Barclays Capital - Global FX Daily
Barclays also expects current market uncertainty to persist. However, unlike UBS and ING, Barclays’ view is that the USD is unlikely to benefit from continued market turbulence:
Prior to the money market issues of last week, a sequence of monetary policy pronouncements by major central banks suggested broad agreement that prospects were reasonably bright. Following the turbulence at the end of last week though, it is difficult to know quite how policy makers are likely to respond, which is adding to an already extremely uncertain picture. We think that financial market concerns will probably persists, in the short run at least, and that investors are likely to continue to move towards more defensive positions in their portfolios in the near term. As discussed in the FX Weekly Brief, the relationship between equities and exchages rates suggests that the NZD, AUD and NOK are the most vulnerable to continued equity weakness, whereas the JPY and CHF will be the obvious beneficiaries of risk reduction. The USD however is unlikely to appreciate if market turbulence continues. In fact, we think it is vulnerable to growing risk of increased home bias and the possibility that the fallout of the subprime problem will further delay the recovery of the US housing market.
Dresdner Kleinwort - FX Compass
Looking to the week ahead, DK expects economic fundamentals to remain in the back seat:
With the VIX trading at a 4Y high, the S&P 500’s market cap down USD 1.14trn since July 19 and the market pricing in a significant risk of an inter-meeting Fed rate cut, interest in economic fundamentals will be limited this week.
Nevertheless, if today’s US retail sales were to disappoint, investors would immediately see this as a proof that unfolding events in the housing market are finally hitting consumer spending; more risk aversion could be the result.
However, market interest may focus even more on the NAHB index and housing starts (Wed/Thurs) with USD risks being once again asymmetrically biased to the downside as positive data surprises will most likely be ignored.
Wednesday’s US inflation data should neither be a much of a factor for the USD sentiment even if CPI was to surprise to the upside. In the past high inflation has never been an argument for the Fed to delay rate cuts if needed.
While this leaves some upside risks to EUR/USD, the discussion whether the ECB will hike rates in September is in full swing with the market revising expectations for a 25bp hike to 50% from 90% at the start of last week. Any signs that EU13 growth momentum is slowing would only support such revisions although we suspect that in the current environment this will not affect the EUR crosses.
UBS - Morning Advisor Europe
Looking for safe haven/risk reduction flows to benefit the USD:
… weakness in credit conditions amongst financial institutions globally cannot be ignored. Further news of large exposures to subprime derivates and other non-performing asset-backed securities are likely, keeping money-market rates high and central banks will be ready to step in to restore order. Although our FX Risk Index has remained in extreme risk-averse territory for some time now the lack of carry unwinding beyond key levels and the stagnation in safe-havens despite equity market volatility suggest investors are not willing to bail out on growth yet. The erosion in home bias, especially in the US, over the last few years has allowed unprecedented amounts of funds to be invested in overseas assets to capture growth in both emerging markets, and recovering economics such as Japan and the Eurozone. The reversal in benign conditions has been sudden which may explain significant investor scepticism and lack of liquidation and repatriation. However, we believe last week’s events set the stage for a brisk-paced decline in overseas holdings by US investors, especially now that portfolios will be under greater scrutiny when access to credit is being sought. In addition, if signs of damage in the real economy across G10 emerge at a time when certain developing economies are showing signs overheating, broader demand for high-quality US assets as a safe haven can only increase from current levels.