As systemic anxiety eased, the US dollar got better traction. The dollar-bloc currencies managed to hold their own as cross positions were unwound.
Major bourses posted gains for the second consecutive week. With the recent advance, several markets, including the S&P 500, FTSE and Sweden, China, Korea, and Taiwan are now positive on the month.
The internecine pitch battle between ECB President Draghi and the man who may very well be his successor, Bundesbank President Weidmann opened a new front this week. It is over the future of the 500-euro note.
The foreign exchange market is unusually calm. The US dollar is little changed against currencies. While the selling pressure that took sterling below $1.39 and the euro below $1.10 has subsided, neither has been able sustain upticks. The euro rose to $1.1040 before sellers re-emerged. Sterling was capped near $1.3965.
The dollar had slipped to almost JPY111.00 yesterday, coming within five ticks of the February 11 low, before rebounding with the recovery in US stocks and advance in US yields. The greenback’s gain faltered near JPY112.65.
When considering the impact of changing currency prices on an economy, trade-weighted measures are appropriate. The Federal Reserve has cited the dollar’s appreciation as a headwind on the economy and a depressant on prices.
The US dollar has begun the week with a strong advance against sterling and the euro. Sterling’s drop, the most in several years, is not a function of macroeconomic policy. It is a function of Brexit and its endorsement by London Mayor Johnson. Recent polls and identified Johnson, who term as Mayor ends in early May, as the second most influential person on the issue after the Prime Minister himself.
The CFTC Commitment of Traders reporting week ending February 16 was short due to the US holiday. This may have contributed to the small adjustments to speculative positioning in the currency futures. It also may reflect the lack of conviction that a dollar recovery was at hand.
Those looking to trade in any of the financial markets will obviously need to have a firm understanding of the basics involved in their chosen asset class. However, what is likely less obvious is the fact that traders in one asset class should at least spend some time monitoring what is happening to price changes in peripheral markets.
John Cryan, the chief executive of Deutsche Bank, has described his bank as “rock solid”. This may be what you would expect to hear from the executive with his hand on the tiller – but it is a bit like a politician talking enthusiastically about their high moral standards. In other words, it can be cause for concern.
There are two broad developments in speculative positioning in the Commitment of Traders report in the week ending February 9. First, the market turbulence saw speculators reduce exposure. Of the 16 gross positions we track, 11 were reducing positions by liquidating longs or covering shorts.
Second, there was an unusual amount of significant gross position adjustments, by which we mean a change of 10k contracts of more in a gross position. There were six such adjustments, and they were equally divided between increasing and reducing exposures.
The conundrum that everyone is wrestling with is the euro and yen’s strength given their negative interest rates and prospect for even lower interest rates. The divergence of monetary policy, even if the Fed is on hold for the rest of this year and next, should be dollar-positive.
