FX Daily Strategy: APAC, Jun 30th
Still in dollar consolidation/correction mode. Period end, options, wait for payrolls also
Spec mkt long dollars and at extreme for GBP. Latter could risk a squeeze
ECB conference, inflation data on the calendar
Markets threatening to be a bit sidelined for by the usual wait on payrolls Thursday, a decent chunk of options at and around the current vicinity (i.e. EUR/USD 1.14 +/-), period end a consideration, and a slight standoff as overbought dollar conditions attempt to unwind.
On the latter front though, it was notable to see just how large and broad dollar long positioning now is on the latest spec data.
This was particularly stark for sterling, up at new extremes for the last decade. While the back testing on this is mixed, it does highlight the clear, albeit not guaranteed, risk of a bit of a short squeeze for sterling at some point in the next few weeks.
There is some potential logic for this, be it ‘buy the fact’ on Burnham, or just the dangers of people running stops if EUR/GBP is forced to take out the range floor that has been in place for some time for instance. Burnham’s big set piece speech focused on devolution and council house building as largely expected and gave a nod to keeping to the fiscal rules (even if its not particularly clear how regional/local growth boosting spending gets covered on this vision).
Even a false break could flush out shorts even if later recouped. UK economic news is hardly bright – the latest batch of credit and housing finance figures were soft and consistent with no hikes – but positioning might be the more important near-term consideration
The ECB get-together continues, with catch up to Lagarde’s speech and then panel discussions that include Bailey and Warsh. Warsh may not give forward guidance but the market still has the chance today and coming weeks to try and build up a clearer sense of his current world view.
On the calendars, Asia sees the latest China PMI and Japan labour market data.
The main focal point in Europe will be ongoing national HICP prints, expected to show peaking out on current trends. UK has final GDP and current account data for Q1.
Near-term, the weakest side is probably further dollar leakage as it sees the consolidative correction complete. Cable has up to 1.33 if the modest bounce extends, while EUR/USD has 1.1450 as the next level up as the oversold recovery stretches further.
USD/JPY also sits off the highs with the obvious ongoing careful action. If the quarter-end does see relative equity performance factor, then in theory that does offer some potential lift for the pair. If seen, the question would be whether MoF intervention would provide any supply into that or it waits for the market to be self-policing.
The US sees June consumer confidence as well as April house price data from S& P Case-Shiller and FHFA. Canada releases April GDP. We expect a 0.3% increase, slightly below a 0.4% estimate made with March data.