While the macro risks remain skewed for a stronger dollar, over the short term the dollar does look to be getting caught up with quarter-end re-balancing flows and the de-leveraging of tightly held positions - including long dollars. Our fear is that some disorderly moves in equity markets could prompt a little more of this position adjustment - even though the macro-driven dollar bull trend remains firmly in place.
President Putin holds an address at 14CET today to likely announce the annexation of four regions of Ukraine. This will also be an opportunity for comment on what seems like sabotage of the two Nordstream gas pipelines earlier this week.
This would suggest even more defensive positions should be taken in FX. Normally this would mean owning even more dollars. Our slight concern is that any disorderly FX de-leveraging in thinning markets could see investors temporarily reduce existing positions - including long dollars. Given the growing threat to equity markets - and based on this year's correlation in the FX markets - we think it is worth looking to position for a lower CAD/JPY. Strategies targeting 100 (-5/6% from current spot levels) during the month of October could be a good hedge for deteriorating conditions. - ING FX Strategy
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