A testing week
Traded volatility continued to moderate into the end of last week. As a result, key currency pairs have begun to settle into a range, albeit one slightly wider than is typical. It has been the lack of devastating news flow regarding tariffs that has allowed an element of normalisation to emerge. The fact that the terms of trade between China and the US have not continued to deteriorate whilst the nations struggle to communicate and meet at the negotiating table has allowed realised volatility to fall. If anything, whilst likely designed only to serve China’s consumers, some goods have been carved out of punitive 125% tariffs on US imports by China, tacitly de-escalating the trade war.
In addition, existing trade negotiations are not, at least so far, highlighting the kind of agreements for a Mar-a-Lago style currency accord that many have been expecting. So long as negotiations with Japan in particular do not mandate a stronger Yen then further Dollar declines will be less likely. As we know, one of the reasons why the sell-off in the Dollar was so severe following Trump’s liberation day was positioning. There was not only a fresh demand to sell Dollars but the market itself as structurally long USD within numerous reporting sectors.
It is starting to become clear that much of that positioning has stabilised with exposures trimmed in absolute terms. There is also evidence from the hot money portions of the market that some profit taking on short-USD positioning is taking place. Whilst by its very nature this could be subject to change very rapidly, for now it will support Dollar buying momentum on dips. This week sees a plethora of data due particularly within the US. That data commences today with the JOLTS job openings data. It will intensify into Wednesday with GDP and the Fed’s preferred inflation measure of Core PCE being published. Thursday and Friday will see attention switch to manufacturing and the labour market with the ISM PMI and non-farm payrolls numbers due on Thursday and Friday respectively.
Discussion and Analysis by Charles Porter
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