An unwinding of positioning dominates FX markets
The price action in G10 FX markets has corresponded with an unwind of positioning in response to Bernanke’s testimony, Wednesday’s release of FOMC minutes and the disappointing China HSBC PMI for May, which entered contractionary territory for the first time in seven months. Our BNP Paribas FX Positioning Analysis indicates that recently the largest position held by investors has been long USDJPY, which has made the pair very vulnerable to position squaring. Elsewhere positioning has been reasonably light, with long USD positions against the CHF, AUD and CAD being the next highest conviction trades. This morning these positions appear to be being unwound. Other markets have reacted negatively to Bernanke’s Q&A session with equities lower across the board and US Treasuries selling off as the market further prices in expectations of QE being tapered. We view that the market has misinterpreted Bernanke’s testimony and dislikes the uncertainty from lack of clear communication around a tapering program (i.e. a lack of clarity around what economic conditions are required and at what pace could tapering take place). The main Fed speakers are not scheduled to appear before the June 18/19 FOMC meeting, suggesting the markets could remain jittery (Bernanke speaks on 2 June but at a graduation event and is unlikely to discuss policy).
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BNP Paribas