The main trading theme in the FX market on Tuesday became the wake-up of dormant USD sell-off, which was a foreseeable development due to the presence of medium to long-term bearish USD macro factors. The only question was when the downward trend would resume. As it turned out, the pause in talks on new fiscal package failed to support greenback.
Basically, when we talk about fresh round of fiscal support, less uncertainty in negotiations on the new fiscal deal also means less uncertainty in the plans of government borrowing, i.e. growth of supply on the Treasuries market and possibly money supply (if the Fed resumes purchases to absorb the supply). For now, it seems that the risk of negotiations put on hold would increase uncertainty about bond supply and cause steeper pullback in T-bonds seems premature.
Accordingly, contrary to my expectations, short positions in Gold were routed earlier and the precious metal went into offensive. Demand returned to the Treasuries market as well. The 10-year Treasury yield appears to have completed its pullback from the last week (after hitting key support at 0.5%) and the trend resumption seems to be finding support and appeal among investors. This allows us to assume that the momentum in assets-safe heavens may be extended to the rest of this week. The rise in risk-free assets, coupled with lull in the stock market (i.e. risky assets), means that roots of the current trend are in the expectations for a new round of borrowing of the US government and corresponding expansionary policy of the Fed.
The CFTC data on USD from August 11 (the latest report) showed that bearish sentiment on USD is one the rise despite extreme positioning. On the contrary, the main opponent, the euro, saw increasing long positions. The net speculative positioning in euro reached 28% of open interest, which is slightly below the previous peak of 30%, which was observed in April 2018. EURUSD was 1.24-1.25 back then, but then turned into a nosedive, which lasted until March of this year.
Weighted by G-10 currencies, the net position on USD declined to -15% of open interest, below October 2017 and is moving to the lows of 2012-2013:
So, from historical perspective USD is significantly oversold, but now, as we understand, there are completely different expectations for the path of expansion of the money supply in the US, therefore, it will hardly be possible to break the trend due to the presence of some extreme positioning.
USD positions were also shaken by mortgage and manufacturing data from the US, released earlier. Negative surprises prepare for a weak August and possible Fed interventions in the fall.
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