Subdued Market Compared to a Week Ago: Is the Dramatic Position Unwinding Over?

by
Marc Chandler
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Overview: The capital markets have begun the week in subdued fashion. Japanese markets were closed for the Mountain Day celebration, and this week's key events, which include US and UK CPI, and the Reserve Bank of New Zealand meeting and potentially its first rate cut. The uncertainty about the market positioning and the extent of the carry-trade may also be dampening activity. The yen and Swiss franc are the weakest of the G10 currencies today, off around 0.4%. The Antipodeans are the strongest, gaining 0.3%-0.45%. Emerging market currencies are mixed. Asian currencies are mostly lower, while central European currencies are a little firmer.  

The MSCI Asia Pacific equity index has fallen for the last four weeks but has begun the new week on a firm tone. Chinese equities were the notable exception today. South Korea and Taiwan led with over 1% gains. Europe's Stoxx 600 has alternated between gains and losses over the past four weeks and eked out a about a 0.25% gain last week. It is trading slightly heavier today, while US index futures are a little firmer. The VIX is trading below 21%.  It was near 18.6% on August 1 and reportedly reached almost 66% last Monday. Benchmark 10-year bond yields are 1-2 bp higher in Europe and the 10-year US yields is slightly higher near 3.95%. Beijing appears to be succeeding in stemming the rally in its bond market and the 10-year yield rose four basis points today, (to 2.23%) the most in a few months. Gold is trading higher for the third consecutive session. It reached $2445. Last week's high set on Monday near $2459. September WTI continues to recover from the six-month low set last Monday below $72 a barrel. It reached $77 before the weekend and about $77.75 today. This is about halfway of the sell-off that began early last month near $83.60. The next retracement is near $79.

Asia Pacific

There have been a wide range of estimates of the size of the yen carry trade but nothing, arguably, very satisfying. And even if the universe of yen borrowing by non-Japanese entities is known, it is not all necessarily carry trades. Imagine a large pool of capital issues samurai bonds but uses the proceeds to buy Japanese brokers. We have suggested that much of the Japanese international portfolio investment seems strategic in nature, and the most recent MOF data showed Japanese investors taking advantage of the yen's gains to buy more foreign assets. Foreign investors, plied with leverage, were more vulnerable and those yen carry trades were in seemingly weaker hands. The next weekly report may trump may be more important than the first estimate of Q2 GDP. China's real sector data late in the week will draw attention, but the market impact typically is modest. The key to the yuan is the fate of carry trades and the yen. Australian dollar was one of the biggest victims of carry-trade unwind. The Reserve Bank of Australia is seen to be among the most hawkish of G10 central banks and barring unexpected weakness in the July employment report, the Australian dollar looks poised to continue to recover. The Reserve Bank of New Zealand meets Thursday, and the swaps market has almost a 65% chance that it will initiate its easing cycle. It was nearly fully priced in a week ago. 

The dollar stalled ahead of the weekend (~JPY147.80) in front of the mid-week high (~JPY147.90). It closed softly close to JPY146.60. With Japanese markets closed today for a national holiday, the dollar has consolidated (~JPY146.50-JPY147.50) within the pre-weekend range. The Commitment of Traders report puts some numbers on one dimension of the yen's short-covering rally. In the week through August 6, non-commercials (speculators) in the futures market covered almost 61k previously sold contracts, leaving them gross short 77.5k contracts. It was the fourth consecutive week of short covering that began with a gross short position of 223k contracts (~$18. 2 bln). The gross short position is now the smallest since April 2023. The bulls added to the gross long position for the seventh straight week. It now stands at almost 66.2k contracts, up from 29.4k contracts before the streak began. Our unscientific survey found that many expect the dollar to take another leg lower. The Australian dollar's recovery for the low for the year (~$0.6350) set last Monday ran out of steam after briefly pushing above $0.6600 before the weekend. It slipped back to $0.6565 today before rechallenging the $0.6600 area. It surpassed the 50% retracement of its drop from around $6800 on July 11 (~$0.6675) but could not reach the next retracement (61.8%) near $0.6625. Speculators cut Aussie long positions in the future market for the third consecutive week. The gross position has been cut by about 38k contracts (to 68.2k), the smallest since the end of June. Each contract is worth AUD100k. The New Zealand dollar has traded similarly; sold below the pre-weekend low before recovering toward last week's high (~$0.6035). The dollar traded between roughly CNH7.15-CNH7.20 over the past three sessions and seems to broadly track the yen's movement. And like the yen, the yuan is trading inside the range seen before the weekend. The PBOC set the dollar's reference rate at CNY7.1458 (CNY7.1449 before the weekend). 

Europe

The UK's big week of data kicks off tomorrow with the latest jobs report followed by Wednesday's CPI. The market is nearly divided about the prospects of another rate cut next month. The central bank's chief economist who voted against the recent rate cut seemed to warn against expecting another one so quickly. Wage growth is expected to slow, and while headline CPI may tick up the core and services measures may moderate a little. The eurozone updates its Q2 GDP report and this renders less interesting the June industrial production and trade figures. Norway's Norges Bank meets on Thursday and a hawkish hold is consensus. Norges Bank is seen as one of the most hawkish G10 central banks, but the swaps market is discounting about a 90% chance of a quarter-point cut before the end of the year. 

The euro slipped in the last four sessions. On a settlement basis, it fell from last Monday's close slightly above $1.0950 to the pre-weekend close of slightly above $1.0915. The euro has settled above $1.09 for six consecutive sessions, the longest such streak this year. Last week's low was set on Thursday near $1.0880, where the 20-day moving average is found today. The (61.8%) retracement of this month's rally is around $1.0865. Today's price action has been confined to almost a fifth of a cent above $1.0910 in quiet turnover. Sterling's price action is more constructive than the euro's. It posted a potential key reversal last Thursday and saw modest follow-through buying ahead of the weekend that was about 1.1-cents above Thursday's five-week low (~$1.2665). It rose to about $1.2780 today (Friday's high was near $1.2775) before stalling and easing back toward $1.2755. Unlike many other central banks, including the Federal Reserve, the European Central Bank, the Swiss National Bank, the Bank of Canada, and Sweden's Riksbank, the Bank of England is less likely to cut rates in September, and this week's data may help solidify such expectations. Resistance is seen in the $1.2800-50 area. While speculative euro positioning was unremarkable with a small build in net longs, sterling bulls cut almost 39.6k contracts, the biggest weekly liquidation of the year. In late July, speculative longs reached a record of about 188.5 contracts (almost $12 bln notional value). After two weeks of liquidation, the gross speculative long position is near 126.1k contracts. 

America

This is an important week for US high frequency data but not so much for Canada or Mexico. Tuesday and Wednesday are about US prices; first PPI and then CPI. The year-over-year rates are not expected to change very much, outside of rounding. Still, the bar to a quarter-point cut by the Fed in September seems low. A half-point move still seems a bit exaggerated. The second half of the week is about the real economy (retail sales and industrial production). Outside of the bounce back in auto sales after the computer glitch in June, retail sales and industrial production are expected to have slowed sharply at the start of Q3.

The US dollar settled near CAD1.3730 ahead of the weekend, its lowest close since July 18. It was the sixth consecutive decline. The greenback is trading quiet against the Canadian dollar today and is little changed. Part of the US dollar's slippage is a function of market positioning. If the higher vol market and carry-trade unwind spurs the liquidation of long positions, the speculators in the futures market had a record short Canadian dollar position. They covered 16.4k previously sold Canadian futures contracts, leaving them with a still substantial position of slightly more than 203k contracts ($14.8 bln notional value). It has not traded below CAD1.37 since July 18. A break of it could see CAD1.3650-60 next. The CAD1.3600 offers formidable support. The greenback peaked against the Mexican peso last Monday near MXN20.2180. Even with a 3-2 vote to deliver its first rate cut since March, the peso extended its recovery, and the dollar settled last week near MXN18.77. It is trading in a narrow range mostly between MXN18.79 and MXN18.8550 today. The next support area is MXN18.50-60. Speculators in the futures market were hardly shaken out by price action that saw the dollar rise by about 14.75% between mid-July and last week's high. In the week ending July 23, speculators had accumulated about 100.6k contracts (~$2.8 bln notional). As of August 6, this had been shaved to about 97k contracts.