A choppy session on light volumes (UBS flows: -20% under the 5 day average) with the USD selling off early into London despite a weaker open for equities in Europe, before retracing some of the move broadly across G10 and EM. The desk's flows show macros have been net buyers of USDs into the weakness, and with the market awaiting the US job print tomorrow it is not surprising to see some USD shorts being squared up. USD weakness is partly being attributed to headlines regarding Russia's wealth fund removing the USD and shifting to EUR, Yuan and Gold — although this affects over $100bn of liquid assets, the transfer will be done via central bank reserves so it is difficult to gauge the market impact. Flows show the standout USD selling has been against CHF and JPY, whilst macros have been net sellers of EUR against the USD.
In EUR, vols have been generally quiet ahead of NFP tomorrow. The desk saw buying interest for the event over the past week via pre post spreads, pushing the gap move up to around 30bp now from 16bp on Tuesday. Risk reversals in the front end have come lower, with spot failing to break out of the range higher a few times. lw-2w riskies are now trading at a slight premium for euro puts. In XAU the desk has seen retail and macro names chasing spot lower as we broke back below $1900/oz, whilst in EM, flows show net sellers of CNH and SGD through the morning.
XAU Under Pressure Into US Non-Farm Payrolls XAU is suffering on the back of risk and positioning reduction ahead of the US non-farm payrolls data tomorrow and with the better-than-expected ADP and ISM releases today. Russia completely removing US dollar assets from its National Wealth Fund in exchange for increasing XAU, EUR, GBP and JPY did bring about some fast money buying in the morning, which seems to have aggravated the XAU drop in the afternoon, both before and after the US data.
USD Buying Across G10 Over Past Days There has been light flow on this USD squeeze across G10 today, and if anything small interest to fade the strength, but really minimal. There has been decent buying of USD over the last few days though, mainly in CHF, Scandinavian currencies and EUR. Clearly the market is a bit spooked sitting short USD ahead of tomorrow's monthly US employment report, and the strong ADP reading did not help calm nerves.
A couple of key levels are being traded at now: in EURUSD, the recent lows of 1.2130, and 110.20 in USDJPY, the recent highs. In EURUSD, given bullish sentiment and positioning, there could be further pain on the way down. USDJPY is probably a bit of a different story with the market being short JPY in the crosses already.
USDCNH Back Up At Highs USDCNH is back to the overnight highs around 6.3950 after the stronger US ADP data. some offers are starting to come in around here, and I would expect more selling interest to be lined up around the 6.40/6.41 area where the pair broke down from to test the lows at the end of last week and start of this week. Flows are light on the desk's side. On the curve, the soft funding has continued, especially during the Asian session, while outright buying is potentially now providing some support for cash as well.
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