The dollar was mixed at midday against the G7 currencies. It was higher versus the NOK and CAD while lower against EUR, SEK, GBP and NZD.
The pound also gained against the euro after the UK construction PMI rose in January, contrary to market expectations for a decline. This went some way towards countering the bearishness after yesterday’s lower-than-expected manufacturing PMI for the same month.
However so far the GBP/USD hasn’t even managed to recover half of the loss that it suffered yesterday, which suggests that the market is looking more for excuses to sell GBP rather than reasons to buy.
The SEK gained even though the Riksbank’s business survey for February was rather gloomy, with companies saying there are “still no clear signs that a rapid recovery is underway.”
The EUR/USD was only slightly higher from this morning’s opening levels. The EU PPI for December and preliminary Italian CPI for January came out exactly in line with expectations and therefore didn’t have much impact on trading.
The CAD and NOK declined during the European morning, while the CHF, JPY and AUD were little changed.
The concern I have about the FX market right now is that positioning is at extreme levels in several currencies. I track the net long or short positions among speculators on the US commodity futures exchanges and rank them over the last five years, with 100% being the largest long position over that time and 0% being the least long (or most short). Right now, MXN is at 0% or the most short it’s been in the last five years; AUD, 2%; CAD, 3%; and JPY, 9%. On the other hand, GBP is at 90%.
What this indicates is that many of my favourite trades (long GBP/CAD, for example) are crowded trades. In these conditions, a small change in market sentiment can have a large impact on rates, as people trying even just to trim positions have a hard time finding buyers. It looks like sentiment towards the GBP, CAD and AUD may be shifting. It’s too early to tell, but I would recommend traders with these positions on to exercise caution.
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