Volatility and position-adjustment to dominate FX
Fundamentals are not driving the FX markets, but position-adjustment amid rising (Bernanke-induced) market volatility is. As argued in recent editions of the US daily, the volatility has originated from the bond market (following Bernanke’s May 22 testimony) and is now feeding through to FX. AUDUSD 1m implied volatility has now risen to levels not seen since June 2012 (Greek election). The implication of rising volatility has been position-adjustment in consensus trades of the past 1-3 months, including long Nikkei, long USDJPY, steepeners in fixed income and more recently USDCHF (see chart). This has taken us out of our long CADCHF recommendation (established Wednesday) for a 1.50% loss. Despite some tentative signs of stabilisation in Nikkei today, Nikkei futures continue to move lower (at time of writing) suggesting that JPY should remain better bid. Today’s US releases should not help USD, but volatility and position adjustment should continue to dominate. We expect personal income and consumption to both have fallen 0.1%m/m in April, while core PCE (Fed’s preferred inflation gauge) likely slowed to a 1% y/y rate, a new cycle low pace.
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BNP Paribas