What next for G-10 currencies and crude oil? – The Property Chronicle
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What next for G-10 currencies and crude oil?

The Macro View

Blurred photograph of crowds walking through London

The euro, the French stock market, OAT-German debt interest rates spreads, the Volatility Index (VIX) and the ghosts of Vichy, Oradour and Algérie française convince me that Emmanuel Macron will be the next President of France on Sunday. So I see no reason to abandon my euro bullish strategy even though the single currency has traded as high as 1.0985 on the eve of the second round French vote. It is significant that the euro has risen to these levels despite the strong US April payrolls, the bankruptcy of Alitalia and ECB President Mario Draghi’s denial of an imminent taper. For now, the trend is my friend until the trend comes to an end, possibly when the financial markets focus on a June FOMC rate hike.

‘Sell in May and go away’? Not for my tribe of global currency market junkies. Even though a 100 MP Tory majority in Westminster in June has boosted sterling, Mrs May and the European Union are now embroiled in a bitter conflict over the UK’s Brexit divorce settlement. Sterling is still the best performing G-10 currency against the US dollar since early April, when Mrs May’s decision to call a snap election triggered the move from 1.24 to 1.2950. The dilution of the power of Little England, anti-EU Tory backbenchers and extension of the parliamentary term to three years lowers the Brexit risk premium and justifies cable in the 1.34–1.36 range. The EU’s demand for a $100 billion Brexit bill is a non-starter for Downing Street – I found it significant that Junker’s demand did not trigger a sterling sell off. This shows the resilience of the sterling bulls, as does implied vols and risk reversal skews in the FX options market. It also did not hurt that UK manufacturing data is at its strongest since 2014. As hedge funds slash short cable positions, not even nasty Brexit rhetoric can avert a sterling move to my 1.36 target!

The Japanese yen at 112 reflects not just US Treasury-JGB interest rate differentials but also the foreign exchange market’s complacency about the risk events de jour – North Korea, FOMC, the French second round elections and US data. Implied volatility in yen options has drifted lower and I see no urgent demand for protection against safe haven flows and as stronger yen. The 50 day moving average at 111.70 was no deterrent to yen weakness. Momentum and positioning suggests the yen can slip to 113. The ideal level to buy dollar/yen would be at the 111.60 chart point.

The Canadian dollar has now tanked to 1.3740 as interest rate spreads between Uncle Sam debt and Canadian government debt continue to widen, as West Texas crude oil falls below $50 a barrel and the Trump White House slaps tariffs on softwood lumber from the kingdom of the maple leaf. The loonie was last at these levels in January 2016, when crude oil was $30 and Chinese markets in free fall. If the CFTC positioning data is reliable guide, macro hedge funds are accumulating short loonie exposures.

The Bank of Canada’s policy statements have amplified the bearish pressure on the loonie, as the rise in implied volatility and risk reversal downside protection premia suggest. Planet Forex loves an ambush and Trump’s tariffs have ambushed the loonie. As the father of a Lord Sebastian Flyte wannabe undergrad at McGill in Montreal, the loonie free fall is a bonanza. Momentum/trend signal suggest the Canadian dollar can well fall to 1.3850 as the next strategy target.

While the Reserve Bank of Australia kept policy unchanged, the foreign exchange markets expects the Canberra central bank to ease rates this autumn. The plunge in iron ore prices and the weakness in Dr Copper shows that China risk cannot be discounted. I was stunned that the Aussie dollar stabilised after the RBA decision near $0.7550, not coincidentally the 38.2% Fibs retracement of the decline from its late March 0.7760 high.






The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer and Partner at Asas Capital. He is responsible for global investment strategies, merchant banking, and the development of the multi-family office investment platform, advising ultra-high net worth royal and family offices in the UAE on global equities markets and foreign exchange.

Articles by Matein Khalid

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