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Drifting Without a Catalyst - Global Exchanges

FICC Podcasts avril 13, 2021
FICC Podcasts avril 13, 2021

 

Disponible en anglais seulement.

In this episode, we discuss the fading themes from Q1 and the lack of a clear dominant theme for Q2.


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About Global Exchanges

BMO’s FX Strategists, Greg Anderson and Stephen Gallo, offer perspectives from strategy, sales and trading on the foreign exchange market, related financial markets, and the global economy.

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*Disponible en anglais seulement

Greg Anderson:

Hi. Welcome to episode six of Global Exchanges, a podcast about foreign exchange markets and related issues. I'm Greg Anderson. In this week's episode, my cohost Stephen Gallo and I will be talking about the fading themes from Q1 and the lack of a clear theme for Q2. The title for this episode is, Drifting Without a Catalyst.

Stephen Gallo:

Hi, I'm Stephen Gallo, a London based FX strategist. Welcome to Global Exchanges, presented by BMO Capital Markets.

Greg Anderson:

Hi, I'm Greg Anderson, a New York based FX strategist. I'm Stephen's cohost.

Stephen Gallo:

In each weekly podcast like today's, we discuss our perspectives on the global economy and the foreign exchange market. We also bring in guests from the FX industry and from related financial markets like commodities.

Greg Anderson:

We strive to make this show as interactive as possible so don't hesitate to reach out by going to bmocm.com/globalexchanges. Thanks for joining us.

Speaker 3:

The views expressed here are those of the participants and not those of BMO Capital Markets, its affiliates or subsidiaries.

Stephen Gallo:

Greg, here we are, it's April 13th, 2021. I think what we can take from your comments in the introduction and certainly the title of this podcast is that nothing is really moving right now. And we've both said in separate conversations we've had with clients has yielded a general theme that conviction levels are pretty low right now. FX I think has a habit of concentrating on other markets or geopolitics rather than things that are purely FX related. Now we had two big themes in Q1. One was the commodity price spike in base metals and energy. Particularly in Jan and Feb. And we had a US 10 year yield spike and a considerable re-steepening of the twos ten's curve. And that was largely a Feb March story.

Stephen Gallo:

My take on it personally, is that something definitely spooked dollar shorts in Q1. And I don't think it was so much a mechanical linkage between the US 10 year yield and the steepness of the twos ten's curve and the dollar, but the move unsettled dollar shorts in Q1, certainly. And part of the story was the expected economic growth differential between the US and the rest of the world. That was Q1 and we had a lot of catalysts there for movement in FX but not so much now does anything else stand out regarding Q1 in your view, Greg?

Greg Anderson:

I totally agree with you about FX trading correlated financial prices. It's what we do in our asset class when there is no major shift in monetary policy, no critical elections and no major geopolitical shocks. At least from what's on the calendar, we don't have any big country elections in Q2 either and as far as geopolitics go, yes, for sure. Things like wars and rumors of wars can definitely have a big impact on FX, but little issues like ships getting stuck in the Suez Canal tend to come and go pretty quickly. I will take careful note of the buildup of troops along the Russia Ukraine border and the growing tensions in disputed waters between Vietnam, the Philippines and China. But I still don't think we have anything that rises to the level of an FX market moving theme for Q2 or at least not yet, not where we stand right now. Or am I missing some major political slash geopolitical development in your neck of the woods, Stephen?

Stephen Gallo:

No Greg, not really. There's not a lot of geopolitical risk in my neck of the woods in Q2. I think we can call the Scottish elections in early May a minor UK political risk, but I don't think it's one that's going to be a market mover for Sterling or UK rates or big market mover for those things. The bigger story for Sterling in my perspective is that we really don't have one. The market got ahead of itself by pricing in the impact of the rapid vaccine rollout in the UK on the economy. But of course we haven't seen the extent to which the vaccine rollout that has fed through because we don't have data from March and April, particularly April. That's an important point in terms of market positioning.

Stephen Gallo:

Perhaps we've seen a similar adjustment in rates in the dollar. Just today on Tuesday, we had a slightly hotter than expected CPI print for the month of March and the bond market just basically yawned. Again, it takes a lot to surprise the bond market and the FX market when you have already seen moves anticipating some of the data that we're seeing. Does that make sense from your perspective, Greg? What do you think about that?

Greg Anderson:

One of the things that happens in markets, particularly FX is that themes get tired after a while. They lose their shock value, so to speak. That causes them to lose their potency in terms of causing price movements even if the narrative doesn't shift. With regard to the issue of CPI, the Fed got well ahead of the uptick going clear back to speeches that Powell and others gave back in January and February. They made it clear that the Fed wouldn't end QE, let alone hike rates because base period effects caused year over year inflation to surge. Yeah, the domestic segment of the dollar denominated bond market yawned at this data, even though the whisper in Asia, which proved correct, caused US rates and the dollar to spike a bit in the lead up to the data. Now that we've had this little slap of dollar bowls, they may be a little more reluctant to make another run on the dollar. If US dollar bowls take some time to cool off, what do you think that does to Euro dollar and to dollar China, Stephen?

Stephen Gallo:

Well Greg, I think that if core positioning in each of these pairs held by FX investors is reduced, the vulnerability is probably Euro dollar higher and dollar CNH lower. I think from a macro perspective, short Euro dollar from the very high teens and long dollar CNH from the lower half of the 650s, makes the most sense on a one to two month basis. For the ECB, their language has so far indicated that any backup in rates is largely going to be counteracted. And I have to imagine that's going to be the case even if Euro zone economic data is somewhat less bad than expected, considering the hole that they're digging themselves out from.

Stephen Gallo:

The other thing that we have to keep in mind is that the bond purchases they're doing, they're a vital support mechanism for the bond markets in Europe. On the RMB side of the equation, definitely can't see how the yield dynamic for the RMB is supportive right now for the currency. And as we can see in the data, the trade surplus is moderating from the improvement we saw in 2020. I think those are the bigger macro stories, which are relevant here. I guess my question to you, Greg, is in terms of positioning, what impact has the settling out of themes have on dollar CAD and dollar yen do you think?

Greg Anderson:

I'll start with the easy ones, Stephen, that's dollar yen. Dollar yen had a big, call it 7% move in Q1 that was caused by speculators buying the pair on the US yield spike narrative. If that narrative loses potency and positions are trimmed, dollar yen is going lower, full stop. It's a lot harder to say what happens in dollar Canada though, because the move lower that we've seen this year and in fact, I'd say in the move that we've seen over the past nine months, hasn't come from speculators aggressively selling the pair. They've been dragged along sort of kicking and screaming and they largely sat on the sidelines while the pair has drifted lower. For CAD, the one place where maybe there has been vulnerable positions is along crosses and I'll point specifically to Euro Canada and Sterling Canada. But with the pop back above 150 over the last week or so, maybe those cross positions have been cleaned out.

Stephen Gallo:

Yes Greg, definitely I think the lack of follow through in the global reflation story in some commodity prices and some recent EM currency, weakness has definitely been responsible for the squeeze on Euro short positions on those cross rates like Euro CAD. I think the question is, is there enough a reflationary theme at the global level to permit Euro CAD to drift lower again? I think the answer is probably yes, but we may be drifting lower from 152 or 151 instead of 148 or 147, because the clear out in Euro shorts may not be over yet. I think we've got to admit, we've definitely seen enough moves in segments of the EM space to suggest that they're coping with the trend rise in US yields, but it's not necessarily a positive force for the EM space and in some cases is an outright negative.

Greg Anderson:

Yep. Higher US dollar denominated yields are a negative factor for EM currencies, for sure. If the US dollar yield spike extends, EM currencies will suffer a bit. However, if US yields pause for the quarter and I think what we'll see is range trading in G10 FX that pushes FX investors into searching for carry. That inevitably directs him towards the EM currencies they have a bit of carry like Mex peso, for example. Look Stephen, it looks like we're in agreement that we're most likely due for a range trading quarter, barring the emergence of some new risk, some unknown unknown, so to speak. Let's talk about ranges. In Euro dollar, we had an average of about call it 121 and a half in January, but then we moved down to about 117 and a half in March. Now we're halfway in the middle at call it 119 and a half. Which side of that range can you see breaking most easily. And in dollar CNH, which have 645 or 665, you think would be taken out most easily?

Stephen Gallo:

Well, first of all, in Euro dollar Greg, 117.50 to 121.50, I really don't think either of those levels breaks easily. And I think you nailed it with your last point basically by saying that stable risk appetite and ranginess in US yields constrains Euro top side because of the Euro's funding attributes. What's good for the carry trade for the time being is negative for the Euro, but at the same time, when you have the lack of follow through in higher US yields, it means the dollar just drifts sideways and the Euro is a direct beneficiary of that.

Stephen Gallo:

And then for dollar CNH, Greg, the way I would look at it is this, I think the PBOC are for the time being fine with a range that's bounded by the low 650s on the one hand and the low 660s on the other. And they certainly don't want a rapid move to 665 or something destabilizing. But let's say that someone was to assert that there was a 40% probability of 665 printing in April. I think that that probability bleeds lower pretty rapidly, pretty quickly if US yields trade sideways. There's just no follow through in US yields so dollar CNH also trades sideways.

Stephen Gallo:

What about dollar CAD, Greg, if we're looking at levels like 123.50 or 127.50, which do you think breaks the most easily?

Greg Anderson:

I going to say probably 123.50 and that could happen if oil just holds it around $60 a barrel for WTI and $50 a barrel for WCS. The other factor that's out there is the BOC potential, a tapering QE ahead of the Fed. The BOC is running out of bonds to buy and that could cause them to begin tapering QE at either the meeting on the 21st of April or the 9th of June. Tapering before the Fed could easily bring us below 123.50 in dollar CAD.

Stephen Gallo:

Okay Greg, so then in Aussie dollar, would you say anything different relative to what your comments just were about dollar CAD regarding the 75, 80 range?

Greg Anderson:

Thanks for bringing that up, Stephen. We don't have the same early QE exit risk for Aussie that we have for CAD. And the other thing that has emerged is that RBA's reserves data suggest it intervened against Aussie strength in March. That is something that Canada couldn't do without the US throwing a fit. I now think that a break of 80 cents in Aussie USD is a low probability thing. I could see 75 cents breaking with much less official or market resistance.

Stephen Gallo:

Well Greg, I think we're going to wrap things up there. We've got enough recording time. We'd like to thank you as always for tuning in and we hope you'll join us again in a week's time for our next podcast. And maybe we'll have a new narrative to discuss at that time.

Greg Anderson:

Thanks for listening to Global Exchanges. Listen to past episodes and find transcripts at bmocm.com/globalexchanges.

Stephen Gallo:

We'd love to hear what you thought of today's episode. You can send us an email or reach out to us on Bloomberg. You can listen to this show and subscribe on Apple Podcasts, Spotify or your favorite podcast provider.

Stephen Gallo:

This show and resources are supported by our team here at BMO, including the FIC macro strategy group and BMO's marketing team. This show is produced and edited by Puddle Creative.

Speaker 3:

This podcast has been prepared with the assistance that employees of Bank of Montreal, BMO Nesbitt Burns Incorporated and BMO Capital Markets Corporation, together BMO, who are involved in fixed income and foreign exchange sales and marketing efforts. Accordingly, it should be considered to be a product of the fixed income and foreign exchange businesses generally and not a research report that reflects the views of disinterested research analysts. Notwithstanding the foregoing, this podcast should not be construed as an offer or the solicitation of an offer to sell or to buy or subscribe for any particular product or services, including without limitation, any commodities, securities or other financial instruments. We are not soliciting any specific action based on this podcast. It is for the general information of our clients. It does not constitute a recommendation or suggestion that any investment or strategy referenced herein maybe suitable for you.

Speaker 3:

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Speaker 3:

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Greg Anderson Chef mondial, Stratégie de change
Stephen Gallo Chef de la stratégie de change pour l’Europe



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