FOREX: Global Carry Trades See Threat From Crowded Positioning, Return of Vol
Jun-04 09:51
- The sustained fade in G10 FX implied vol off the post-Liberation Day highs is helping provide a supportive backdrop for FX carry, and while the long-held status of JPY as a funding currency has ebbed since last year's intervention, other currencies have stepped in to take advantage of regional dislocations (most recently HKD and CNY), which are compensating for falling policy rates among traditional carry targets such as the MXN, AUD and others.
- BNY Mellon write that while there is little sign of market volatility picking up (meaning better risk-reward on carry trades) they believe conviction in these carry trades is not strong - and markets need to exercise greater caution amid an increasingly crowded strategy. They flag CHF, CNY and SEK low-yielding, funder currencies, all of which have large current account surpluses (which support a home investment bias in the context of US trade rebalancing), meaning the risk-reward profile for carry trades is likely to become structurally less attractive, tempering expectations around future returns.
- We see the sharp pull lower in local Hong Kong rates (both HIBOR and HKD funding rates) and the TWD spot rally has boosted the currency's status as an APAC funding currency, however persistent pressure on the weak-side of the FX trading band, a building 2025 IPO pipeline and improved corporate activity (bond sales, dividends) may mean pressured local rates are short-lived through the rest of 2025.
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CROSS ASSET: The Dollar falls, Gold firms above $3,300.00
May-05 09:41
- Some downside continuation for the Dollar, testing intraday lows against the AUD, NOK, CZK, SGD, ZAR, GBP, JPY, and {o4} Gold has broken back above $3,300.00.
- AUDUSD is looking to break above 0.6500 ahead of the next resistance at 0.6528 High Nov 29 ‘24.
- USDJPY is eyeing 143.73, this was Friday's printed low.
BONDS: Initial resistance in Bund Holds, Focus on the US ISM Today
May-05 09:34
- A lighter start for the German Bund and wider EGBs, the UK Markets are closed for their Bank Holiday, and Investors are turning their attention towards the FOMC on Wednesday, and will remain attentive to any Tariffs news.
- The initial small resistance noted at 131.16 Today has held, so far printed a 131.14 high.
- European peripheral spreads are closer to flat on the Margin.
- The Swiss CPI came below consensus earlier but had no impact on Govies, even the Swissy (CHF) now trades at higher level post the Inflation Data.
- There's still some Focus on the Data front for Today, the US services PMI will be final reading, but some attention on the US ISM services and its components.
- ECB Stournaras will speak at Forum in Athens later today.
FOREX: Greenback Edges Lower in Partial Reversal of Friday Rally
May-05 09:27
- The greenback is modestly softer against all others in G10, as markets partially retrace the phase of USD strength posted into the Friday close. EUR/USD is back above the $1.13 handle, which is helping support EUR/GBP above 0.8500. Trade deals and negotiations remain a key focus this week, as reports circulate deals could be announced by Friday. Japan, India and South Korea are seen among the nations with the most advanced negotiations.
- Meanwhile, after an extended period of consolidation, AUD/USD is gaining following the surprisingly strong showing for Anthony Albanese in the weekend's general elections. The price action puts the rate above the 200-dma and a close above would be the first since November last year. 0.6550 is the next key level here, marking the 61.8% retracement of the downleg posted off the late September low.
- JPY is among the strongest currencies in G10, benefiting from the modest pullback for US equity futures as well as firmer regional APAC currencies. The run higher in TWD has seen the central bank respond with a press conference today which, while not disclosing any new measures, saw the central bank talk down speculation that Taiwan would settle for a firmer currency at the request of the US.
- US ISM services data is the scheduled highlight Monday, with central bank speak quiet as the Fed remain inside their pre-meeting media blackout.
