The fact that the AUD is now the second largest net-short position among the majors does not really surprise given the recent string of negative factors such as the virus situation, slowing economic data in China and falling Iron Ore prices. This week we have the RBA policy decision coming up and markets want to know how stressed the bank has become given the recent challenges.
It seems that consensus is expecting the bank to cancel their planned tapering that would have started in September, with more aggressive bets forecasting the bank to announce a higher pace of at this week’s meeting. Either way it will be an important one to watch for the AUD.
For the NZD and CAD continued to move closer to neutral positioning. For the CAD this was hardly a surprise given the stretched positioning to begin with, but the NZD was a surprise with the currency not being able to take meaningful advantage of the most hawkish among the majors.
This week the quarterly employment data from New Zealand will be crucially important as it will be the last big ticket data points before the August RBNZ policy decision and could either seal the deal for a hike or could push back some of those expectations in the event of a very big miss.
JPY, CHF & USD:
The JPY remains the biggest net short among the majors, and surprisingly has failed to take any real advantage of the drop lower in US10Y . Given the wash out in treasury positions and the move towards 1.14% in US10Y the JPY has not really taken the bait to appreciate as one would have thought.
Thus, even though the currency remains oversold from a positioning point of view, it does show that there is some possible asymmetry in long USDJPY right now as a move lower in yields have not negatively affected the pair, and at these lows the probability is skewed towards US10Y upside.
For the Dollar, it’s going to be a very data heavy week with the main event being Friday’s July jobs report. As the Fed’s focus has shifted away from and towards the labour market, the jobs data will be watched closely as a gauge to see whether we are moving towards or away from the Fed’s goal of ‘substantial further progress’. Make sure to also keep track of the data points feeding into Friday’s NFP such as the two ISM PMI reports as well as the ADP National Employment data.
The Pound is still in a net-short positioning despite the fundamental outlook still remaining for the currency. That is a positive in our view as it shows that a lot of the frothy positioning has been flushed out after the June FOMC meeting.
This week the main event for the GBP will be the upcoming BoE policy decision coming up on Thursday. With hawkish comments from BoE’s Saunders, some participants have argued that we could see a possible dissention at this week’s meeting on whether to continue with or whether to cut back.
For now, it seems premature for the bank to cut purchases with the furlough scheme still needing to be unwound. The bank would arguably want to see how the labour market holds up before they commit to normalization, and that means waiting until at least October, in which case they would only have about 6 weeks of purchases left, which means the higher likelihood right now is that runs out as expected.
For the EUR net-long positioning has continued to fall with the data updated until 26 July. As expected, the EUR managed to grind out some mild gains against the greenback, but unfortunately given the choppy price action going into FOMC we weren’t able to benefit the rewards and was taken out at break-even on our long EURUSD positions.
This week, with a light calendar for the EUR it’s going to be a very Dollar focused week for the EUR in general. The weak bias remains intact fundamentally, so any continued upside in EURUSD into key resistance areas could set up some interesting shorting opportunities.
However, with such a busy data week ahead, it might be best to wait for data points before engaging the market, especially as we are now officially in the thinner liquidity and lower month of August, we might be in store for some choppy price action in between key data points.