The USD has posted impressive gains against most currencies during the past four weeks and just bounced off some year-to-date highs in most cross rates. The USDJPY rate climbed more than 6% since mid-July and currently trades at 107.09. The YTD high is at 107.39 and was reached on 12 September.
We advise to take profits in USDJPY ahead of this week’s FOMC meeting, but note that we are inclined to open new USD long positions around 105.90 and again at 105.00 in case of USD dips. If the FOMC surprises on the hawkish side, we will go long USDJPY immediately.
This week’s event risk aside, our long-term expectation for the two currencies remains unchanged: USD long and JPY short.
The British pound came under pressure after the publication of the YouGov September poll results, which hinted at more people being in favour of Scottish independence than initially thought. In fact, the number of people saying “yes” to independence were in the majority for the first time with 51% of the votes. Although there clearly is an actual possibility of Scottish independence, the latest results should not be overstated. Polls have wrongly predicted voting outcomes in the past. People are naturally more inclined to vote against drastic regime changes, and saying “yes” in a non-committal poll is a different thing from doing so when it comes to actual voting altogether. We are convinced that the Scots will vote against independence in the referendum on 18 September.
Traders should still entertain the possibility of increasing volatility and GBP weakness as we get closer to the referendum. EURGBP is currently at 0.8014 and with GBP net positioning still long we see substantial downside risk for the British pound during the next two weeks. Those who would like to keep their GBP long trades open might want to hedge against this particular event risk, if their position is not outright speculative, or at least make sure to have a stop loss limit in place.
Our longer-term view remains EUR short and GBP long, so we will likely re-enter EURGBP shorts once uncertainty abates.
Presented above you find the gold intraday chart for the past ten trading days. The logical question astute market observers will ask themselves is this: Why have we frequently been seeing increased volatility starting around 1pm London time? The London gold fix (a.k.a. the “London gold price rigging telephone conference”) is at 3pm local time and US trading starts at 2:30pm. Algos gone wild, perhaps?
Market participants have been trying to explain the wondrous strength of the euro for many months now, but the single currency continues to hold its ground against the currencies of Europe’s major trading partners despite the still struggling European periphery and increasingly disappointing economic data from the currency union’s core countries.
Today’s chart presents the EURUSD exchange rate on a weekly basis plotted against the balance sheets of the European Central Bank and the Federal Reserve. It suggests that central bank assets have played a key role in EURUSD movements since the beginning of the crisis in 2008. As can be seen, the USD tends to depreciate relative to the EUR when the Fed’s balance sheet grows faster than that of the ECB and vice versa. In fact, the relative development of the two central banks’ balance sheets has explained the EURUSD exchange rate almost perfectly.
What does this mean for the immediate future? If the above relationship continues to hold, the EUR is unlikely to depreciate significantly versus the USD as long as the Fed’s balance sheet is still growing or the ECB does not launch a QE programme of its own. The large EUR short positioning in the market is in favour of this scenario. However, watch those central bank assets, because their values will converge eventually and then EURUSD might finally drop out of its robust upwards trend ignited by Mario “Whatever it takes” Draghi in July 2012.
I’ll be at the Annual Conference in International Finance at Imperial College London on Tuesday, 1 July 2014.
This is the second time Imperial College Business School hosts this excellent FX conference on recent academic findings relating to international finance. The event is sponsored by BlackRock and the Royal Economic Society. Topics covered include, inter alia, the forward premium puzzle, FX risk premia and investing in a post-QE world.
I’m going to write about the papers presented when I’ll be back, so watch this space over the next few weeks if you’re into FX research.