FX Carry Trades Improve

Market Brief

A quiet start to the week as the USD has been broadly unchanged against G10, yet slightly weaker verse EM FX. The lack of movement is following decent US payroll data on Friday and stronger than anticipated Chinese trade data over the weekend. Longer term, with the US economic data continuing to improve, the ECB heading towards an extended period of monetary accommodation and volatility at low levels, FX should be prepared for carry trades to improve. CFTC IMM CTA data showed that USD long positions are now at the highest level since March and net short EUR and JPY positions have increased. In this environment short USD/BRL remains one of our favorite carry fueled trades (see Weekly Report for World Cup rally).

G10 Advancers - Global Indexes

Asia regional indices were stronger across the board as the Nikkei rose 0.31%, the Hang Seng 0.61% and the Shanghai composite rallied marginally to 0.10%. Asian yields followed US treasury higher as the US 10yr rose to 2.59%. On the data from China, trade surplus widened to $35.92bn vs. $22.6bn expected, the largest monthly surplus since early 2009. The results were a balanced rise in exports 7.0 % y/y, while imports fell 1.6% y/y. In Japan data showed that GDP Q1 grew 1.6% q/q vs. 1.4% expected (preliminary estimates of 1.5%). Business spending surprised higher rising 7.6% while consumer spending was in line at 2.2% q/q. In addition, Japan’s BoP current account surplus expanded to ¥187.4bn in April, but less than the expected surplus of ¥287.7bn. From the ECB, Executive Board member Benoit stated that Eurozone interest rates will diverge from rates in the UK and USA for years. As central banks in Britain and the US raise rates, the yield differential will help weaken the EUR which should assist in importing disinflation and hurting Europe's fragile economic recovery.

With a light economic data calendar, FX volatility continues to fall and with vacation in France, traders should expect FX to be range bound. Equity volatility has fallen near a seven year low. Traders will be watching Canadian housing starts, expected to fall to 185k vs. 195.3k revised prior read. The stronger CNY fix aided AUD/USD up but still below the 0.9356 high reported after the US NFP data release. AUD remains well bid in the crosses ahead of Thursday's RBNZ meeting where traders expected high probability of another 25 bps rate hike.

Todays Calendar of Events

Currency Tech
EUR/USD
R 2: 1.3775
R 1: 1.3735
CURRENT: 1.3654
S 1: 1.3585
S 2: 1.3503

GBP/USD
R 2: 1.6996
R 1: 1.6882
CURRENT: 1.6817
S 1: 1.6780
S 2: 1.6693

USD/JPY
R 2: 103.02
R 1: 102.80
CURRENT: 102.41
S 1: 102.10
S 2: 101.45

USD/CHF
R 2: 0.9037
R 1: 0.8995
CURRENT: 0.8928
S 1: 0.8908
S 2: 0.8882