Month-end Rebalancing Leaves USD Especially Vulnerable to Q4 GDP
- Last trading day of the month means position squaring.
- See the DailyFX Economic Calendar for Friday, January 30, 2015.
With futures speculative US Dollar long positioning coming off of an all-time high, end of month book rebalancing puts the buck on thin ice for today's data. Traders had staked out the largest long position as far back as 1993, and for the most part, that's been the best trade; after all, the US Dollar was the top performing G10 major last year and has dominated thus far in 2015.
Nevertheless, even if recent price changes are considered to be the number one factor in traders' minds for decision making in the present (something explained best in Robert Shiller's classic Irrational Exuberance), we can't dismiss the fact that any given narrative seemingly driving the market can change in an instant.
One such narrative driving markets - and the greenback's divergence from the other majors - is the idea that the US economy is back on top of the world, the envy of all other advanced economies. The Q4'14 GDP release today at 08:30 EST/13:30 GMT will serve as a heat check to this narrative; without the support of above-trend (generally considered to be 2.5-3% annualized) growth, the US Dollar loses a lot of its luster quickly.
The benefit of a stronger GDP figure today would also help cement the perceived policy divergence between the Fed and the rest of the world's central banks. After the Russian central bank cut its main rate from 17% to 15% today (while noting that they're not worried about inflation, because the decline in growth should offset price concerns...ouch), there have now been a total of 14 central banks to ease policy in 2015 (h/t to Zero Hedge). Perception is often more important than reality; and right now, the perception that the Fed is more hawkish thanks to strong growth and labor data is a narrative the US Dollar can't afford to lose.
--- Written by Christopher Vecchio, Currency Strategist
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