Highlights:
- US Dollar finally puts head above water after 33-month low, expectation for another hike grows
- Canadian Dollar is cock of the walk as market bets on more BoC rate hikes
- Commodity market still favored by hedge funds as CFTC shows record net-long growth by funds
- Sentiment Highlight GBP/USD net-short position grows 60% WoW, favoring GBP strength
What a day for risk. USD/JPY rallied aggressively after trading at a 2017 low on Friday and the S&P 500 rose the most since April to close at all-time highs. Other risk-off markets like Gold gapped lower on the open and the US Treasury 10-year yield also bounced showing investors wanted risk over a fixed return. Things look good, at least for today.
This week will provide a lot to chew on in terms of what lays ahead. A lot of focus in the FX has shifted to the UK and Canada. The UK is loaded with data this week. Tomorrow brings the CPI print, which could pressure the BoE into needing to hike rates despite concerns voiced by Carney of a smooth Brexit, lack of business investment, and real wage growth. Traders will not have to wait long to see what the BoE is thinking as they meet on Thursday and to announce the rate (expected to hold), and outlook on policy, which is where most volatility is expected.
Keep an eye on our economic calendar for Economic Data Points
Canada has taken the FX world by storm. The difference between the US 2yr yield and the CA 2yr sovereign yield has flipped by 80bps since May. This large shift is responsible for the large move favoring the Canadian Dollar since May and reflects the market’s new view of the Federal Reserve’s outlook and the Bank of Canadas. Currently, the US 2yr yield is yielding less than CA 2yr by ~20bbps. On Friday, USD/CAD traded to 1.2062, which was the strongest since May 2015. Where traders once looked to Oil for direction on the Canadian Dollar, the yields on front-end CA bonds have taken over.
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The commodity markets remain a focus for an understanding on risk sentiment, which as mentioned earlier has recently ticked higher. Per the CFTC Commitment of Trader’s report on Friday, managed money extended net long copper exposure to a record 125k contracts. Despite the dip in price on Friday, manager money is looking for further gains, which could be due to China. On Monday, China’s Producer Price Index outperformed and Consumer Price Index beat expectations, which helps to show global reflation is back on track.
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FX Closing Bell Top Chart: USD/JPY violently rebounds from 2017 low
Chart Created by Tyler Yell, CMT
Next Week's Main Event: GBP Consumer Price Index (YoY) (AUG)
IG Client Sentiment Highlight: IGCS sees GBP/USD shorts increase 60% WoW
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
GBPUSD: Retail trader data shows 30.8% of traders are net-long with the ratio of traders short to long at 2.25 to 1. The number of traders net-long is 9.6% higher than yesterday and 27.6% lower from last week, while the number of traders net-short is 3.2% higher than yesterday and 53.5% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed GBPUSD trading bias (emphasis added).
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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