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FAROS TRADING | FX MORNING UPDATE

Market Summary – 08/09/2010

Good Morning.
We issued a special report detailing our study of the
causal relationship between the USD and CNY flexibility,
please have a look in your inbox.
Quiet session overnight in Asia and Europe and we first
look to the IMM report issued on Friday which saw a
substantial increase in USD shorts of no less than $10.3bn.
The short position is now $16.7bn in aggregate. 2009 saw
a peak of $25.4bn in USD shorts. The EUR position
remains stubbornly net short, in line with many bank
research departments. JPY positioning grew by $2.7bn to
$7.0bn, the highest since December.
A couple of interesting articles overnight with the FT
talking about the Fed set to downgrade the US outlook
but unlikely to take ‘big’ steps yet (referring to QE2). UK
Telegraph Evans-Pritchard was also negative on the US
outlook. This dovetails with a GS report issued Friday
taking US GDP for next year down below 2% with
unemployment rising above 10%.
USD/JPY saw retail interest and options related interest to
buy and retail are now a substantial long in the market
(estimated just under $18bn). Stops lining up at 84.80 in
size and then 84.30 after that. Japan’s Fin Min Noda
indicated ‘excessive moves are undesirable’ and ‘watching
carefully’. We feel intervention at these levels is very
unlikely.
An article over the weekend indicated that China bought a
record amount of JGBs according to the MoF and this
again in line with our view on how China is managing
their reserves.
China data leaked indicating industrial production at
13.5%, retail sales at 18.6%, CPI at 3.5%, PPI at 5.0%, new
loan growth at $700bn and CNY M2 at 18.6%.
We heard of central bank USD bids in USD/KRW and
USD/TWD on the back of strong export figures from
Taiwan with 38.5% vs. 31.9% expected.
Quiet session in London trading with GBP/USD and
EUR/USD initially dropping at the open and GBP/USD has
come back a little better bid but failing to take out the
1.6000 barriers. EUR/GBP tracking the 50 day very well at
0.8319 with our view that a break higher here is likely and
should help the EUR/USD catch up with the GBP/USD’s
outsized performance. A UK telegraph article discussed
the BoE likely outlook with inflation remaining above 2%
and growth likely revised down to 3.2% next year and
3.4% in 2011.
USD/ZAR made another move down through 7.2000
briefly on leveraged selling but comes back bid again.
European EM trading well overnight with TRY a noted
underperformer relative to HUF and PLN and if we
continue to hold above the 100 day in EUR/TRY at 1.9702
we are likely to test 2.0000 in the near term.
CHF spot remained relatively calm and we heard of
chunky CHF vol buying going through as the spread to
EUR vol in 1m and 1y tenors has collapsed.
Good Luck

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