The USD attempted to push higher overnight amidst continued “risk off” sentiment, but it stumbled a bit during the early European session.
Equity markets are still in the red due to softer-than-expected China activity data, higher-than-expected UK inflation that might delay rate cuts, and warnings from the ECB about excessive easing expectations.
Interestingly, it appears that, at least for this morning, the EUR and GBP are finding support from local hawkish re-pricing rather than the prevailing “risk off” mood. Nevertheless, there is always room for unexpected policy observations. With equities remaining uneasy, I don’t expect the USD to retreat significantly.
As for USD-JPY, it continued its upward trajectory overnight, extending its strong start to the year with a 4.5% rise year-to-date. This sharp increase contrasts with the change in US-Japan yield differentials over the same period. CFTC data suggests a 60% reduction in short JPY positions from mid-November to levels last seen in April 2023. Besides spot losses and negative carry, some of these positions may be abandoned due to low conviction ahead of the upcoming BoJ policy meeting on January 23. Market expectations for a policy shift have been pushed further into 2024.
Both AUD and NZD saw declines against the USD in overnight sessions following disappointing China data. While China’s economy expanded by 5.2% YoY in 2023, December retail sales fell short of market expectations, and home prices experienced the most significant drop in close to nine years. Despite arguments that the recent sell-off in AUD
and NZD may appear excessive, I believe otherwise given their sensitivity to global equities and US 10Y real yields. Short-term metrics suggest a fair value range of 0.6290-0.6667 for AUD-USD and 0.6017-0.6263 for NZD-USD. Additionally, USD positioning against the AUD and NZD, as per IMM data, has swiftly shifted from net long in mid-November 2023 to net short in the most recent edition – the fastest flip from net long to net short USD speculative positions since 2017. This explains the rapid rebound of the USD.
Fundamentally, I maintain a bearish stance on AUD-USD and NZD-USD in the near term, considering their significant deviation from the relationship with Chinese equities and USD-RMB. Furthermore, if expectations for Fed easing diminish, it will exert downward pressure on these currencies from both a risk sentiment and relative yield perspective.
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
