There’s little to report after a quiet holiday weekend as Europe and North America are taking a well deserved break from trading. Still, it’s useful to ponder the extreme speculative positioning in the US currency futures market.
US Retail Scene
The final days of the US Christmas shopping rush and the post Christmas sales push seems to show retailers rather desperate to unload inventory at steep discounts, which could lead to modest overall growth in sales, but a squeeze on profit margins as demand is seen as relatively weak. This theme will likely continue into the New Year, as the output gap and continued private sector deleveraging will mean persistently weak consumer demand, even as the Obama administration does everything within its power to pump the economy into the November election. On the latter, the next attempts at stimulus are likely to arrive in the coming weeks, as the president and Congress only have a two month extension of the payroll tax cuts and other measures after Jan 1. The US budget credibility/stimulus dance has become mind-bendingly awkward in recent months and can only remain so, considering the egregious US fiscal imbalances, which are as bad as any European country and only enabled by a lax Fed.
Speculative picture – too much Euro focus and what does it mean?
The weekly US futures market positioning reports show that the retail market virtually only interested in speculating on a weaker Euro, as positioning elsewhere is very anaemic and mixed – the market is long USD in some places and short in others (only against the JPY and AUD). The Euro bearishness, in fact, set a new record the week before last, just beyond the previous record of -113.8k contracts from May of 2010, just after the US flash crash. The Euro bottomed out in June of that year at slightly less extreme positioning and at a price of around 1.20 before launching a furious rally. One other interesting measure of Euro speculative positioning then and now: as the Euro was bottoming out back in 2010, almost 40% of all speculative currency bets among the six most traded USD crosses was a EUR/USD position. That was the highest ratio until…last week, when over 39% of positions were in EUR/USD.
So what are we to make of this? Clearly, the Euro focus is too dominant and the roll-over into a new year may be just the trigger for a trimming of positions and a new focus elsewhere. Does that mean EUR/USD is primed for a steep rally? That could certainly be the case if we are to believe that history repeats. But what if history merely rhymes? In other words, the relative performance of the Euro may improve suddenly in the New Year for a time, but that outperformance may appear more prominently in crosses like EUR/AUD if we see a combination of the EU able to keep a lid on sovereign debt yields in an environment of weak risk appetite and a shifting of the focus away from Europe and more toward the risks from a weak Chinese economy. EUR/AUD is not priced for this development, having recently crosses to a new low well below 1.30. (A proxy for those who would prefer to steer clear of the Euro might be AUD/NOK, which is trading at the highest level in a generation as the NOK has experienced collateral damage from the Euro. The AUD/NOK level raises serious alarm bells from a valuation perspective.)
Chart: EUR/AUD
EUR/AUD has crossed to a record low well below 1.30. One wonders whether the move is overdone on a valuation and positioning basis, and there is certainly room for the contrarians to make a case here on a short term basis. The technician might wait for the market to prove itself first with a strong move back above the old 1.30 area before drawing any conclusions.
Japan – China deal on CNY
Even as China continues to manage the strength of its currency every day, it also continues to pave the way for more direct convertibility of its currency around the world. Over the weekend Japan and China struck a deal that will allow the two countries to directly transact deals in CNY and JPY without first requiring a conversion into US dollars. There was also a move to allow Japanese companies to issue yuan denominated debt on the mainland as well as intentions announced by Japan to directly purchase Chinese government bonds. That latter measure looks rather symbolic, considering the enormous bond issuance needs of the Japanese government itself. MISH discusses the Japanese announcement that it will sell some JPY 150 trillion in government bonds in 2012. As we have discussed before, Japan is the canary in the coal mine in sovereign debt markets once the interest rate cycle turns higher.
Looking ahead
This week may continue to sputter along with little volatility, but the latter is likely to return rather quickly in the New Year if we consider the pipeline of events, including the onslaught of European debt issuance (Zero Hedge features some coverage of the issuance pipeline in a post from yesterday.) And soon after the New Year, we’ll have a firmer read on US consumer demand in the supposedly recovering US economy and corporate earnings quick to follow.
In the meantime, let’s all hope we can enjoy a weak of peace and quiet and contemplation. The US session features the latest US Conference Board Consumer Confidence reading and, CaseShiller house price data for October (ancient history – the NAHB and other indicators telling us that the US housing market heating up a bit), and the two of the smaller regional US manufacturing surveys.
US Retail Scene
The final days of the US Christmas shopping rush and the post Christmas sales push seems to show retailers rather desperate to unload inventory at steep discounts, which could lead to modest overall growth in sales, but a squeeze on profit margins as demand is seen as relatively weak. This theme will likely continue into the New Year, as the output gap and continued private sector deleveraging will mean persistently weak consumer demand, even as the Obama administration does everything within its power to pump the economy into the November election. On the latter, the next attempts at stimulus are likely to arrive in the coming weeks, as the president and Congress only have a two month extension of the payroll tax cuts and other measures after Jan 1. The US budget credibility/stimulus dance has become mind-bendingly awkward in recent months and can only remain so, considering the egregious US fiscal imbalances, which are as bad as any European country and only enabled by a lax Fed.
Speculative picture – too much Euro focus and what does it mean?
The weekly US futures market positioning reports show that the retail market virtually only interested in speculating on a weaker Euro, as positioning elsewhere is very anaemic and mixed – the market is long USD in some places and short in others (only against the JPY and AUD). The Euro bearishness, in fact, set a new record the week before last, just beyond the previous record of -113.8k contracts from May of 2010, just after the US flash crash. The Euro bottomed out in June of that year at slightly less extreme positioning and at a price of around 1.20 before launching a furious rally. One other interesting measure of Euro speculative positioning then and now: as the Euro was bottoming out back in 2010, almost 40% of all speculative currency bets among the six most traded USD crosses was a EUR/USD position. That was the highest ratio until…last week, when over 39% of positions were in EUR/USD.
So what are we to make of this? Clearly, the Euro focus is too dominant and the roll-over into a new year may be just the trigger for a trimming of positions and a new focus elsewhere. Does that mean EUR/USD is primed for a steep rally? That could certainly be the case if we are to believe that history repeats. But what if history merely rhymes? In other words, the relative performance of the Euro may improve suddenly in the New Year for a time, but that outperformance may appear more prominently in crosses like EUR/AUD if we see a combination of the EU able to keep a lid on sovereign debt yields in an environment of weak risk appetite and a shifting of the focus away from Europe and more toward the risks from a weak Chinese economy. EUR/AUD is not priced for this development, having recently crosses to a new low well below 1.30. (A proxy for those who would prefer to steer clear of the Euro might be AUD/NOK, which is trading at the highest level in a generation as the NOK has experienced collateral damage from the Euro. The AUD/NOK level raises serious alarm bells from a valuation perspective.)
Chart: EUR/AUD
EUR/AUD has crossed to a record low well below 1.30. One wonders whether the move is overdone on a valuation and positioning basis, and there is certainly room for the contrarians to make a case here on a short term basis. The technician might wait for the market to prove itself first with a strong move back above the old 1.30 area before drawing any conclusions.
Japan – China deal on CNY
Even as China continues to manage the strength of its currency every day, it also continues to pave the way for more direct convertibility of its currency around the world. Over the weekend Japan and China struck a deal that will allow the two countries to directly transact deals in CNY and JPY without first requiring a conversion into US dollars. There was also a move to allow Japanese companies to issue yuan denominated debt on the mainland as well as intentions announced by Japan to directly purchase Chinese government bonds. That latter measure looks rather symbolic, considering the enormous bond issuance needs of the Japanese government itself. MISH discusses the Japanese announcement that it will sell some JPY 150 trillion in government bonds in 2012. As we have discussed before, Japan is the canary in the coal mine in sovereign debt markets once the interest rate cycle turns higher.
Looking ahead
This week may continue to sputter along with little volatility, but the latter is likely to return rather quickly in the New Year if we consider the pipeline of events, including the onslaught of European debt issuance (Zero Hedge features some coverage of the issuance pipeline in a post from yesterday.) And soon after the New Year, we’ll have a firmer read on US consumer demand in the supposedly recovering US economy and corporate earnings quick to follow.
In the meantime, let’s all hope we can enjoy a weak of peace and quiet and contemplation. The US session features the latest US Conference Board Consumer Confidence reading and, CaseShiller house price data for October (ancient history – the NAHB and other indicators telling us that the US housing market heating up a bit), and the two of the smaller regional US manufacturing surveys.