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The Federal Reserve chair Janet Yellen endorsed a further rise in rates as long as inflation and employment data meet the Fed’s expectations. With payroll data due Friday, a decent showing from those figures probably represent the final confirmation for a move next week. The markets are locked, loaded and ready – a move is priced in, near-unanimously expected by forecasts, who on balance now also agree with the Fed’s projection of three moves this year.
But with last week’s CFTC data showing record shorts in 10-year note and 3-month Eurodollar futures contracts, the market is also heavily positioned for a move. Hence, with North Korea lobbing missiles into the Sea of Japan this morning, we have a slightly risk-averse start to the week, with 10year Note yields back under 2.5%, the Nikkei weaker and the Yen strongest of the major currencies (though only 0.2% higher against the dollar). Markets may be in a standoff for the next few days.
FX market positioning is much light than bond/rates positioning. Net USD longs have shrunk further, despite the dollar overall having risen over the last few weeks. The net yen short is a little above the 5year average, but the Euro short is significantly smaller than its 5-year average. The dollar ought, therefore, to be able top benefit from any push higher in US yields – if one were to materialize. That’s a big ‘IF’ however.
We’ll stay long USDJPY, long EURGBP ahead of the UK budget, and we like the look of SEKJPY long and GBPSEK shorts too.
The Norwegian krone has fallen in the past two weeks. USDNOK’s uptrend from early February remains in place so long as 8.40 holds.
Buy USDNOK at 8.4539, targeting 8.60 with a stop at 8.40. This trade would work best on a combination of a stronger dollar and a greater risk shake-out.
CFTC data show that speculative dollar longs remain elevated, but the positioning has also continued to decline from the December high.
