January 09, 2018
The U.S. Dollar broadly stronger against the G10 amid higher U.S. 10 year bond yields and renewed interest by macro investors to add to enter into long USD positioning. Dollar strength also coincided with a weaker Chinese renminbi after the Chinese central bank is said to make a change to the regime used to manage the yuan. The move has prompted many to speculate the Chinese central bank will be more flexible in allowing the pair to fix higher in the future. The Japanese Yen is one of a few outperformers this morning, as the Japanese currency rose against all of its G10 peers during the Asian session as the Bank of Japan reduced its purchase of super long bonds prompting some speculation on that front that the BoJ may be looking to unwind its loose monetary policy. Yen vols are trading a touch higher this morning but remain consistent with overall higher vols across most G10, especially in the 1 week and 1 month tenor. Meanwhile the Euro fell for a third straight session despite stronger than expected German Industrial Production data and falling Eurozone unemployment. Euro positioning is no doubt a culprit in the move lower with long Euro positioning crowded in the new year and weak positioning falling off. Initial support in EUR/USD comes in at 1.1930-50 but with the Euro trading heavy we look for a test lower towards 1.1860 support next. Finally GBPUSD is trading lower this morning after PM May’s cabinet shuffle didn’t go as planned with a few senior ministers outright refusing to follow her orders. With U.K. data deteriorating and May’s ability to successfully navigate Brexit talks in question, we continue to look for this pair to trade lower, targeting a move back down towards 1.3300 in the medium term.
The Canadian Dollar is opening steady against the US Dollar this morning, gaining some support from narrowing two year sovereign yield spreads and a drop in options skew as traders become bullish on the loonie ahead of the January Bank of Canada meeting. BoC rate hike expectations for January are now above 90% according to the OIS curve, as all six big Canadian banks now call for the 25bps rate hike next week. On the options front, one month vols are stabilizing but two and three week vols remain elevated over the BoC decision and next round of NAFTA talks. On the NAFTA front, President Trump has indicated he is looking for a “better deal” while Mexican representatives say they want to see results from the Jan 23-28 meeting in Montreal.