Read on the Trading Floor - 20 Oct 2023
Today’s focus… USD divergence from rates
Macro Themes At Play
A plethora of headlines and narratives this week but limited displacement in FX ... ranges are holding as known unknowns dominate positioning and sentiment into the weekend.
Most noticeably, the USD has diverged from the last leg of the US10yr rate sell off. For example, 30bps on the week has surprisingly not taken USDJPY through 150.00 (is the threat of intervention that much?), especially given the downside beat to inflation we saw overnight in Japan (3% vs exp 3.2%).
..... or is USD positioning simply overstretched... no more USD to buy? (ING FX Daily - Dollar showing textbook overbought behaviour )
China data basing may also be weighing on the USD. There is a glimmer of hope on the horizon that we may start to rotate away from US exceptionalism if Europe/China growth outlook can bounce from their current depressed levels. Furthermore, the record PBoC funding push overnight, continues to focus the mind on potentially more stimulus from authorities by year end.
Weak equity leadership as MAG7 finally feels some gravity... USD assets are sold and not reinvested in US equities, those USD return home to UK/AU/JP as the leaders of this year's rally underperform ... Nvidia, Tesla etc
JPM podcast (EM Fixed Income - Rising yields and geopolitical tailrisks) ... highlights the lack of weakness in EM rates/credit markets relative to the US 10year sell off. If EM fund mangers do not feel the pressure to buy USD hedges / protection, it will also generate the price action that we've seen over the past few sessions in USDMXN, USDZAR etc
Tensions in Middle East remain local? What type of ground incursion will Israel run?! The base case for the street seems to lean on a localized rather than a regional war (we can only pray for no mistakes as tensions remain heightened...)
US debt ceiling, leaderless House, funding two wars, greater issuance in 2024 to fund the growing interest rate bill, fiscal pushing the long run rate higher, BoJ YCC widening dropping foreign appetite, 2s10s to un-invert until the recession finally appears... is a US2s10s steepening bearish USD as demand for US assets dwindles, long end duration as well as equities ...
In hindsight its always easy to fit a narrative around price action, but a friend of @HarksterHQ shared a fantastic graph early this week. The lack of movement this week in EURUSD is par for the course, simply trading in line with its YTD performance. EURUSD 2023 range pales in comparison to the previous 3 covid years. This chart gives me shivers, are we grinding back to a 4 vol G10 FX world?
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