FxWirePro: A tour on G10 FX apprehensions and positioning ahead of major risk events in Q4

The major burning and worrisome issues across the globe are: Trade tariffs tit for tat sentiments, Central banks rigid stances of both dovish and hawkish approaches, and the US political noise did little to revive soft realized FX vols. Italian risk may be re-emerging, but choosy tactical vol shorts are still well cushioned. 

While the bearish standpoint is turned on Brazil election vols following their intraweek spike. It is difficult to discern an overarching macro theme from the messy and differentiated price action of the past week. Distressed EM FX has recovered, but while safe havens are weaker in sympathy (JPY and CHF), so too are high-beta G10. 

Market apprehensions concerning about Italy’s public finances stability prevail. Against this background, investors continued to demand a higher credit risk premium on Italian government bonds while the EURUSD was hovering in early European trade within distance from Friday’s two-week intraday low of 1.1566. Elsewhere, the CAD was among the main outperformers in FX markets on news that Canada was to join the US and Mexico to form a revised NAFTA deal. Looking at this week’s calendar, focus is on Friday’s US non-farm payrolls report for September.

While valuation is putting a floor under the cheapest EM currencies for now, we do not believe that this translates to a broad-based weakening in USD or upside for high-beta currencies more generally. The key fundamental supports of the dollar remain in place, namely leadership from US growth and the Fed and hence US yields. 

Hence, while the stabilization in EM warrants a less defensive stance in the portfolio this doesn’t mean abandoning the long dollar bias, let alone going short, in fact, we increase our long USD exposure through USDJPY as a proxy for higher US yields that doesn’t necessarily take down US equities. 

The long position in USDJPY is balanced by a short in NZDUSD to leave us long dollars but now more neutral on the overall direction of risk markets. Stay short EURCHF on Italy, albeit long CHF trades vs GBP and NZD were squared off. While book profits on long NOKSEK. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly EUR spot index is inching towards -2 levels (which is neutral), while hourly USD spot index was at 61 (bullish) while articulating (at 10:50 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex