The Trade Week Ahead – Currency Point: Intra - Week movers

Currency Point: Intra – week movers
EUR / USD – Medium term view $1.09

I remain solid in my view that EUR / USD is trending lower over the coming period. This is in the main, due to its carry trade funding position it finds itself in. However, there is an interesting intra – week long trade building as trades cash in on the bloating in short positioning – could see a short rebound.

This chart shows that short positions are heavy with the cash position sitting at E13.26 billion, which is the highest level and its been since December 2016. This data is slightly old; however, the trends shows that shorts have continued to build in the past 7 days suggesting a new 3-year record.

We are thus mindful of a short squeeze in the pair, considering the backdown from the President over the mid-May tariff threat on Euro-automakers the unwind could go all week and see EUR/USD back above $1.12. intra-week long call on the pair targeting $1.12.


AUD / USD – That escalated quickly

I backed off my AUD / USD short call to early, my reasoning was that the RBA looked like it would hold off cutting rates until the middle part of the year on the back of making employment core to its reasoning.

That has now been blown away, the employment data of last week will all but force the RBA to cut rates sooner than expected. I still hold a contrarian view that it will hold off cutting until August, but the market is now pricing in a 63% chance of a rate cut in June its fully priced in by the August meeting.

This led the pair to plumb a new 4-month low of 68.8c last week as the central bank differential hit its largest in years and a theme that is likely to dominate for most of 2019.

However, there are two factors that are likely to see the AUD/USD recover some of this ground in the interim. First is China, most of the headlines of late has been around the trade issues with the US. However what might have been missed is the PBOC’s move on the yuan, its weakness has slowed the AUD’s fall as China is stimulating again. There is a caveat here the PBOC knows that if USD/CNH hits 7.00 outflows ramp up something China will look to avoid but any stimulus from China is an AUD positive.

The second is the news from Vale that it is facing further issues with its dams and its iron ore output in 2019 is under real threat. BHP, RIO and FMG spiked on this news last week and iron ore prices have begun to bounce. If copper follows suit in the coming days risk currency will follow them higher.

Thus, calling a very short-term long call on the AUD/USD, shorts will unwind and commodity markets are likely to lift, looking for a return to high 69c trading a stop at 67.95.

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