It was a big week for the NZD after the RBNZ followed in the BOC’s footsteps by bringing forward rate hike projections to Sep 2022. Keep in mind the reason why we haven’t seen a correspondingly big uptick in NZD positioning is because the CFTC data is only updated every Tuesday and does not include the big moves seen in the NZD from Wednesday.
For the CAD, even though the bias remains unchanged, sitting at over 44K net-long, the second largest among the G10, one has to argue that the CAD has been looking rather stretched at its current levels. That, of course, doesn’t mean the bias has changed, but it does not mean at these levels the risk to reward to continue buying the CAD doesn’t look that attractive.
In the week ahead for the AUD, we do have the RBA policy meeting coming up. However, the more anticipated meeting is the July one as the bank previously highlighted that they would use the July meeting to provide additional guidance regarding their program and their Yield Curve Control. Thus, the June meeting are not expected to provide any real fireworks.
JPY, CHF & USD:
Real yields, FED policy and Reflation expectations continue to be key drivers for the US Dollar . That means that incoming data will be very important for the market as it will be used as a gauge to determine how far or how close FED tapering will be.
In the week ahead there are several important data points coming up which will be interesting inputs for the US Dollar .
What a week it was for the JPY, which fell off the proverbial cliff at the latter part of the week. Pressured not only by US10Y staging a bit of a recovery on Thursday, but more influenced by month end flows where Citi bank noted that they estimate Japanese investors will need to sell JPY to reduce hedges on foreign bonds.
With month-end effects mostly out of the way, the focus for the JPY will once again fall on US yields.
The bias for Sterling remains intact. Positioning has once again reflected the bias as the biggest build in net-long positions with the most recent CFTC data.
Sterling made some impressive runs in the past week as the markets reacted very favourably to comments from BOE’s Vlieghe who noted that there could be scope for faster policy normalization if the economy develops in line with their estimates and more importantly if the negative impact from the phasing out of the furlough scheme is contained.
Markets took the news very positively, as they were hawkish comments from a more neutral member. However, they comments were very conditional on the labour market staying firm after furlough ends.
Also, Vlieghe won’t be at the bank after August which means that his comments surrounding should be taking with a pinch of salt as it does not necessarily represent the views of the actual voting members .
It’s going to be a quiet week ahead for the GBP in terms of economic data.
Still the biggest net-long position among the majors. Issues surrounding the fundamental outlook for the single currency still has complications, but with the vaccination roll out gathering momentum we have seen sentiment data picking up on the prospects of a reopening. The EUR has remained well supported over the past few weeks as the USD continued to lose favour and as markets look towards a fast economic rebound once the vaccination efforts allow the EU to lift restrictions.
If the EU can reach their vaccination targets, we could well see a faster recovery playing out in the EU. However, when we compare that potential recovery in terms of growth or differentials, or compare the policy response between the US and UK or compare policy normalization expectations it seems the EU is still lagging behind that of the US and the UK.
For that reason, we are staying patient with our med-term view on the EUR for now and will wait for more information and data before we change our mind.