Daily Market Outlook, May 24, 2021

Risk sentiment was steady at the start of the new week, with most major Asian equity indices trading higher, albeit modestly. Reports that excessive speculation and ‘fake news’ had partly been behind recent rises in commodity prices, saw China step up its efforts to bring about a dampening effect. The government vow strict punishment for any monopolistic activity in spot and futures markets and for those companies and individuals that spread fake news and displayed signs of excessive speculation.

The coming week’s global economic calendar is less busy, but different views on the risks for the inflation outlook could maintain a degree of volatility in financial markets. Participants will also continue to weigh signals confirming the economic recovery with concerns about new variants and rising Covid cases in some parts of the world. Here in the UK, the government is keeping a very close eye on rising cases of the so-called Indian variant, with the next stage of the easing of restrictions in England set for 21 June.

On the basis that lockdown restrictions domestically continue to be eased back, the UK is expected to see a sharp upturn in economic activity. In its recent Monetary Policy Report, the Bank of England (BoE) revised higher its forecast for GDP growth this year to 7.25%, which, if realised, would be the fastest rate of growth in more than 70 years. Later today, a cohort of BoE officials, including Governor Bailey, Deputy Governor Cunliffe, outgoing Chief Economist Haldane (hawkish) and external MPC member Saunders (dovish) will testify to Parliament’s Treasury Select Committee where they will have an opportunity to flesh out their latest thinking. In particular, the BoE’s central expectation that the anticipated pickup in inflation will prove transitory is likely to attract a lot of scrutiny.

Elsewhere, it is a relatively quiet day with the US Chicago Fed National Activity index for April, the only data print due. As the debate around when the Fed may start tapering asset purchases continues, a number of US Fed speakers are slated to speak, with Brainard (14:00 BST), Mester (16:00), Bostic (17:00) and George (22:30) on today’s agenda. Last week’s, comments from US policymakers were mixed with Harker and Kaplan calling for discussions around tapering to begin sooner rather than later, while others such as Daly continued to call for more patience as more than 8 million people are still unemployed in the US relative to pre-pandemic levels.

CFTC Data

USD Short Steady as CAD, EUR Sentiment Strengthens Data up to Tuesday May 18 released on Friday May 21.

CTFC data for the week through Tuesday May 18th showed a minuscule USD33mn increase in aggregate USD shorts for a fifth consecutive week of net positioning flows against the dollar, with the position holding at -USD15.4bn (biggest bearish bet since early-March).

Beneath the unchanged overall position, speculative accounts added USD630mn to net CAD longs now totaling USD3.8bn the highest mark since November 2019 as shorts begin to more clearly capitulate to the CAD’s strength with USDCAD trading just shy of the 1.20 level, a six-year low.

The net EUR long position, at roughly four times net CAD longs, rose by USD1bn adding to the previous week’s even larger USD1.5bn increase to total USD15.3bn which is still around half of its peak last August. The EUR was the second best performing major currency over the week to Tuesday (after the CHF) as it aims for a firm drive above 1.22.

With limited movement in the aggregate positions for the AUD, NZD, and MXN, the net aggregate USD short held steady as negative sentiment in the JPY extended for a third consecutive week, with accounts adding USD1bn to net JPY shorts. At USD5.8bn, yen positioning is at its most bearish since late-Apr.

GBP net longs were trimmed slightly by USD282mn to total USD2.2bn with gross short contracts rising to their highest level since mid-February with speculators possibly eyeing a correction in the GBP as it nears its year-to-date high of 1.4237 (and its strongest level since April 2018). Overall positioning in the GBP has held relatively steady since mid-March.

Despite the CHF’s outperformance over the week, bearish positioning in the currency increased by USD199mn to total a USD594bn bet against it. This is the biggest net short in the CHF since early-2020 with accounts likely betting that it reverses part of its 5%+ appreciation since late-March (the strongest performance of the currencies in this report)

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

EUR/USD: 1.2145-60 (1BLN), 1.2200 (1.3BLN), 1.2260-70 (400M)

GBP/USD: 1.4150 (298M)

AUD/USD: 0.7710-20 (695M), 0.7725 (689M), 0.7750 (561M)

USD/CAD: 1.2100 (358M), 1.2150 (875M)

USD/JPY: 108.45-50 (443M), 108.80 (360M), 109.00 (285M)

109.15-25 (380M), 109.50 (521M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.2150 bullish above

EURUSD From a technical and trading perspective, the close through 1.2120 is constructive but bulls must defend 1.21 to set up a test of 1.2270/80. A close through 1.2150 would suggest a corrective phase developing.

Flow reports suggest topside offers strong through the 1.2275 level and increasing on a push above the 1.2300 level all the way to the 1.2350 before weak stops are joined by buyers on the move through the highs of the last couple of years, downside bids light through the 1.2200 area and weak stops likely on a dip through the level and opening a quick move through the 1.2150 area and towards 1.2100 where stronger bids are likely.

GBPUSD Bias: Bullish above 1.41 bearish below

GBPUSD From a technical and trading perspective, as 1.3960 now acts as support, bulls will target a retest of 1.4230’s. Only a close back below 1.41 would concern the bullish thesis opening the window for a corrective cycle.

Flow reports suggest topside offer through the 1.4200 level with weak stops likely to open a test through to the 1.4250 before stronger offers start to appear through to the 1.4300 level and a long term trend line likely to have attracted option barriers, a break here does however likely see stronger stops appearing and the market opening to a larger move towards the 1.47-1.48 area. Downside bids light into the 1.4100 with weak stops on a move through the level to test quickly through weak sentimental 1.4050 and stronger bids then appearing for any test of the 1.4000 level

USDJPY Bias: Bullish above 108 targeting 112

USDJPY From a technical and trading perspective, as 108.30 supports bulls will target 110.70’s, a closing breach of 108.30 would suggest a corrective move to test 106.30

Flow reports suggest downside light through the 109.00 level with weak stops below the 108.80 and opening the market to a new test of the 108.00 level, stronger bids into the 107.80 however, a break through the level is likely to see weak stops and breakout stops appearing and the market free to quickly test 107.50 and an old trendline then nothing until closer to the 107.00 area where stronger bids start to appear but the downside opening to Feb levels, topside offers through to the 110.00 level with light congestion through the figure level and weak stops possibly limited and stronger offers likely increasing on a move higher towards the 111.00.

AUDUSD Bias: Bearish below .7790 bullish above

AUDUSD From a technical and trading perspective, the breach of .7790 refocuses attention on the downside as .7820 contains upside attempts, look for a test of .7680.

Flow reports suggest downside bids light through the 0.7750 area and stronger bids likely continue through to the 0.7700 area before weak stops appear below the 0.7680 and a stronger 0.7650 area then holds the downside, topside offers into the 0.7800 area with weak stops through the 0.7820 before opening for a new run higher and strong offers likely through the 0.7840-60 area to build for the 79 cent level.

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