USD: Positioning looks to be the key driver - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that there does not appear to be one clear broad macro theme driving the foreign exchange market at present but the US dollar remains under downward pressure with numerous reasons cited.

Key Quotes

“The most common explanation – that the markets are paring back rate hike expectations despite the stronger than expected employment report on Friday – is questionable. Short-term yields in the US have been retracing the move higher from the end of last week but the move is modest and doesn’t appear entirely consistent with the dollar sell-off.

Indeed, there is more compelling evidence that markets are simply not being driven at all by relative monetary policy dynamics. Looking at the likes of AUD/USD, NZD/USD and USD/CAD, these spot rates would be at much stronger US dollar levels were the market focused on changes in monetary policy expectations and short-term rate spreads.

The extent of the dollar sell-off may simply be a reflection of dollar long speculative positions being liquidated in relatively thin trading conditions. The speculative market has remained long dollars and with the US presidential election likely to be in full focus when markets return after the summer break in September, market participants may well be lightening positions at this stage.

Low trading volumes also often results in the currencies of current account surplus countries performing well. That is in evidence today with the Korean won, the Taiwan dollar and the Japanese yen all out-performing. As of Q1, South Korea is running a current account surplus of 7.9%, Taiwan’s surplus is even larger at 14.4% and of course Japan’s surplus is surging of late and is now over 4.0% of GDP, approaching record highs from before the financial crisis. Certainly there is no single clear over-riding theme to explain the extent of dollar selling which makes us sceptical of this being anything more than a thin trading summer move that could well prove fleeting.”