In the sessions before and after the UK referendum speculators in the currency futures did three things. First, they generally reduced exposure. This means gross longs and short positions were reduced. Of the 16 gross speculative currency futures positions we track, 12 fell.
The dramatic reaction to the UK decision to leave the European Union has changed the technical condition in the foreign exchange market. While the precipitating factor is a fundamental political development, it is mediated by psychology. Group psychology is the subject of technical analysis. In the current context, the technical analysis puts the price action in the larger context and provides mile-markers, as it were, and potential inflection points.
Sterling is recording its daily advance since 2008 today. It is up about 2.3%. The ostensible driver is the weekend polls suggesting that, as we suspected the murder of the UK MP acting as a catalyst of sorts for public opinion. The odds makers in the betting houses and the events markets have also shown a shift toward remaining in the EU.
The US dollar recovered from the sell-off sparked by the poor employment data released on June 3. It continued to move higher after the Federal Reserve met and shaved its forecasts for the next year and 2018. The number of Fed officials that think only one hike may be appropriate this year increased from one in March to six in June.
The market is discounting less than a one in 10 chance of a July hike, though an upward revision to the May jobs data coupled a robust June report would likely see the perceived risks increase.
We have a lot of power with China. We can’t continue to allow China to rape our country, and that’s what they’re doing.
– Donald Trump, May 1, Fort Wayne, Indiana
For over a quarter-century now, the US Treasury Department has released a formulaic report on the currency policy and practices of key economies on a semi-annual basis. On occasion, it has hauled up a trading partner as a ‘currency manipulator’ and proceeded to jawbone that partner to appreciate its currency and shrink its bilateral trade surplus. This was the case with South Korea and Taiwan in 1988 and then again in 1992 with China and Taiwan.
Renewed allegations of “currency manipulation” in the US-China bilateral agenda have less to do with the Chinese renminbi than US election politics and the Fed’s anticipated rate hikes.
Even before the start of the eighth and final Strategic and Economic Dialogue (S&ED) of the Obama administration, the issue of the exchange rate is back on the agenda.
News that Switzerland’s reserves rose to a new record high of CHF602.1 bln in May from CHF587.9 bln in April spurred talk that the SNB has been intervening covertly. One media account cited one trader that terms the intervention as “massive.”
We are skeptical. Given the massive holdings of foreign currencies, we suspect that the swing in valuation likely accounts for an apparent increase in reserves. The reserves are reported in Swiss francs and it fell against both the euro and the dollar in May.
The US dollar is trading with a heavier bias to start the month of June. Weaker stocks and firmer bonds has seen the yen rise the most, while sterling’s losses have been extended after an ICM telephone survey showed a small lead for those favoring Brexit.
The Wall Street Journal is reporting that minutes of a meeting in China two months ago reveal that officials there have abandoned their commitment to give market forces greater sway in setting the yuan’s exchange rate.
