The Trade Week Ahead – Currency Point: Bond Flows and the EUR EM and AUD

Looking at three distinctly different trades currently – the EUR and its struggles, EM currencies against the USD and the AUD’s carry trade headwind.

EUR

EUR/USD is chasing the March 8 low, the EUR had been rallying off the back of the FOMC U-turn around rate and its general outlook. However there appears to be three key reasons for the EUR’s current declines:

  1. Brexit uncertainty has clearly flared up again, which does impact the EUR due to the economic impacts.
  2. EUR-funded carry trades (considering German Bunds are negative) are clearly very attractive for investors and traders alike.
  3. Cannot escape how poor the March flash PMIs were. The Eurozone growth renaissance is ‘dead’.


Chart is clearly suggesting that $1.115-$1.120 is a very likely move.


EM FX

Clearly there are strong capital outflows from EM the most likely scenario here is asset repatriating on fears there is a future down turn coming. Under normal trading theory, what is currently transpiring in bond markets should be an attraction for high yield environments. However, this has not been the case and trading shows that DM bonds have actually outperformed EM bonds in the past month.

This is supports the idea of USD repatriation thus looking at small longs in USD/MYR, USD/INR and USD/KRW.

AUD

The Aussie 10-year yield hit a new record low last week and that trend looks like continuing. The Australian bonds have always had an attraction for carry traders, particularly JPY traders this tend puts that under pressure.

Couple this with the Australian economic outlook continuing to slide (see the latest PMIs and consumer confidence data points) there is growing pressure on the RBA to cut the cash rate which would send yields lower still. All this is a negative for carry traders looking for maximum returns. This provides a short AUD/JPY opportunity on JPY repatriation.

The risk would be near-term data that would positively impact the AUD thus am mindful of possible US-China movements or better than expected commodity pricing. But as it stands and the markets the way it is we are short AUD/JPY.

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