Tuesday October 18, 2005 - 22:51:59 GMT
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Foreign Exchange Analytics - www.fxa.com
Forex: Brief Anecdotes On Market Position
Get a distinct sense that discretionary traders in hedge funds and banks are not carrying lots of risk in FX majors - i.e. the dollar. The range in then euro in place since the beginning of the summer is intact until 1.1865 goes and it would appear that every reserve manager is quite happy to buy euros near 1.19, preventing what should by all right be a move lower. Cable too is holding above the Jul low, though dlr/chf and dlr/yen have broken higher.
So the dollar is still fairly trendless at or near the highs and from here most are not willing to add to longs or establish new longs...not until 1.1865 goes.
So where are specs dabbling in FX land? Emerging Latam and East Europe. Asia trade is off...if anything mkt has flipped to long dollar short Asia in wake of disappointing move after the Jul21 yuan reval. For fancier punters, long Latam, short Asia is working. Also think there is a very long kiwi and C$ trade still in the mkt and never like crowded trades much. Though barring major global slowdown see little reason to think the market will head for the exit doors on these quasi commodity, high yield currencies where c banks are hiking (RBNZ to tighten next week, BoC did today).
I think the dollar breakout will take a break higher in the 10-yr Tsy note (above 4.50%). But like the euro not trading under 1.19, US 10-yr note does not want to show a yield above 4.50%...those same reserve managers reducing FX exposure are still acquiring US Tsys.
Finally breaking 4.50% in yield means markets need to believe more in the Fed's noisy inflation alarms of late and be more certain, as the Fed appears, that the economy has sufficient momentum to keep the Fed tightening or lift inflation expectations (implies less need to hike more).
Markets have good reason not to buy the Fed's level of concern about inflation as the expansion is built on very shaky ground and vulnerable to sinking to much lower, less inflationary pace of growth.
Lastly I would say funds and traders are long global equities but this trade is looking not only crowded but tired. With global yields climbing and a huge run up this year in European and Asian stock markets, the risk free rate of return should draw hot money out of the equity market. Moreover the thing that keeps the 10-yr note from trading above 4.50% in yield could lead to a greater unwind of stocks...that the economic wheels indeed come off in 2006...just when is the question. So the dollar bias is from the long side to take a trade from the market. But put on the 6-month goggles and the risk reward for euro/dlr for sake of argument is 1.15 on downside for 1.35 on the topside.
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