There's a month, quarter and half-year-end feel to market moves, and it's a clearing out of positions feeling in the foreign exchange market, according to a senior City analyst.
In a note to clients on Thursday (28 June), Kit Juckes, head of FX at Société Générale, wrote that given the current market mood, the more US President Trump backtracks on trade conflict with China, the more markets worry that the Federal Reserve will have to tighten and the more money flows out of corporate bonds and emerging assets.
"That's one narrative, anyway. Another is that the die is now cast and the next US economic downturn is on the way. The word ‘recession' was being flung around like confetti on Bloomberg yesterday afternoon."
The notion that in the back of market participants' minds there's growing concern about the longevity of the economic cycle fits in better with market action than just seeing this as a trade spat and cash flowing out of emerging markets, Juckes added.
"TIPS yields are well off their peak and falling, and market pricing of terminal Fed Funds is going down not up. If you add growth concerns to the inflationary consequences of the trade dispute, the prospect of more Fed tightening and Fed balance sheet reduction, it wouldn't be all that surprising for more money to find a rock to hind under, than to look for opportunities to get to work buying the dip."
This is hardly a wonderful backdrop for the dollar, but it still seems to win the ‘best of a bad bunch' award with most of the market. Buying the yen has been incredibly frustrating, but still feels like the right way to go, he added.
Buying EUR/USD only makes sense as a super-optimistic bet that European politics will remain calm and that positions have been flushed out. It might be fine for a punt with a tight stop but Société Générale’s September 1.15 forecast tells you how comfortable the bank feels.
“We're in a 1.10-1.20 range for now (I think), with better times likely after the summer. I realise that's not much use as a view,” Juckes added.
With oil well supported but markets so edgy, NOK is the pick of the FX market along with the yen. NZD has a dovish central bank and AUD needs commodities, and Chinese prospects, to improve. CAD is oversold but Thursday (28 June) is hardly the day for that fight. And the pound is still having to face up to endless negative headlines about Brexit, and the economic risks a trade-deal-free-exit might entail. The next couple of days will be about book-keeping and positions.
