Macro: Sandcastle economics
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Summary: The action on the first real trading day of the year for USD traders suggests that at least some of the USD weakness at the end of last year may have been down to end-of-year flows. Weak regional German December CPI prints ahead of the national data today also helped the euro weaken, with EURJPY plunging to new multi-month lows as the yen enjoys lower yields, although JPY crosses have bounced from intraday lows, particularly USDJPY.
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FX Trading focus: The USD wakes up with a bang on first real trading day of the year in the US. USDJPY bounces hard, even as JPY enjoys strength on a plunge in global yields today.
The vicious rally in the greenback today came seemingly out of the blue, but there can be no doubt that the calendar roll effect is in play somewhere in the mix as traders are putting capital to work on the first real trading day of the year in the US, as treasury market futures opened up overnight and US traders are back to work with markets open everywhere save for Japan (which comes back online with the Wednesday session tonight).
The EURUSD is particularly heavy today, with perhaps four drivers in the mix. The first is the calendar year roll (though that could have unleashed flows in either direction) and the second is positioning: the futures positioning in the US is shows a non-commercial long EURUSD position that has rarely been exceeded in recent history. The last time the net long non-commercial position was above the current +146k contracts (as of last Tuesday) was for a few months in the summer of 2020, when the positioning reached an extreme of +215k, and when the long topped out around 150k in early 2018. (To be fair, some of that may be on EUR-cross trades, but the market is extremely long of euros, given that the speculative positioning in most other USD pairs is long the USD). Third, the regional German December CPI prints out this morning were far weaker than expected ahead of the national number this afternoon – adding to the “peak inflation” narrative that would soon have the market second guessing the ECB’s relative hawkishness if that development deepens. As well, with record “heat” across much of Europe in recent days, Germany has remarkably even been able to build natural gas supplies in the middle of the winter, while power prices are tumbling. Finally, there is the technical development of EURJPY plunging to new multi-month lows and through fairly well-defined range support
The move in the US dollar today can be taken at face value if it sticks into the close today as it suggests considerable pent-up capital flows being put to work that may have been bottled up heading into the year-end, awaiting the clean P/L slate of a new calendar year. The odd combination, however, of a strong US dollar and strong US treasuries and strong risk-on is an odd one, although the last of these has faded as the European session has passed lunch time. Interesting to see if the key US data this Friday pushes back against the strength in the treasury market or encourage it and the impact on the US dollar. If yields bump back higher, the JPY strength, already reversing sharply versus the US dollar and elsewhere today, could turn into a deeper consolidation. USDJPY is attempting a hammer reversal in today’s daily candlestick if it can close near 131.00 or higher after trading sub-130.00 intraday.
Chart: EURUSD
The bottom has dropped out of EURUSD suddenly as 2023 get underway in earnest with today’s first trading session in the US. As discussed above, a number of factors are likely conspiring to drive EURUSD lower and it was overdue a consolidatory move after very little two way action in the rally that was sparked shortly after the November 3 FOMC meeting. Friday’s US data is the next test for USD pairs, and this chart can now easily consolidate back toward the 200-day moving average below 1.0350 without necessarily re-establishing the old down-trend. Parity is the bigger area for major trend implications, and lies only six pips north of the 61.8% retracement of the entire rally off the 0.9536 lows to the 1.0735 high, which comes in at 0.9994.
Table: FX Board of G10 and CNH trend evolution and strength.
The weak USD reading rapidly unwinding today, but would take some time to register a new broad up-trend. The JPY rally reading has intensified, but we have seen an interesting back-up in USDJPY today – maybe it has done most of what it is going to do against the greenback for now, but what about in other pairs? Still looks heavy there (see below for the individual JPY pairs).
Table: FX Board Trend Scoreboard for individual pairs.
A small victory for the mean-reversion argument case I made for NZDCAD back when it was trading slightly higher a month ago (and went higher still before the large reversal – could be more to come there). USDCAD is already teasing an upside trending move, but clearly needs to break out of the current congestion area. NZDUSD is also crossing over into negative and looks a more promising candidate for USD bulls, followed by AUDUSD if it takes out the range lows.
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