All about positioning on rate moves

June 9, 2016

The overnight volatility on currencies has come from central bank decision and also lack of them. The main surprise was with the cut in rates from the Bank of Korea, cut to 1.25% (from 1.50%). This was on the cards, but there was not a strong expectation for it happening this month. The impact on the won was initially negative, but that has since recovered to stand little changed. In stark contrast, New Zealand kept rates on hold after their policy meeting, but the currency rallied nearly 2%. Even more interesting were the comments on the exchange rate from Governor Wheeler, who said it was “higher than we want” and that their ability to influence it in a sustained way was very limited. He also underlined that there was scope to cut rates should it be needed. The currency reaction, NZD rising to 0.7148 (from just below 0.70), was more about positioning, with a significant minority of market participants anticipating an easing at the June meeting. This didn’t come to pass, hence the covering of short positions. In the wider picture, with the Fed on hold, the fears that have dominated emerging market currencies and equity markets for much of the past year (impact of higher dollar) are easing and emerging market currencies are feeling more buoyant as a result.

For today, ECB President Draghi is speaking early on, but so far little of substance has come through to impact the single currency. Sterling continues to be ever more sensitive to Brexit sentiment and polls, with two weeks to go until the EU referendum. We have trade data at 08:30 GMT, which I’m sure will be brought into the debate somehow, whilst the usual US claims data is seen later in the session. Stocks continue to creep higher on the supportive global backdrop, but it is a slow creep. Gold is pausing after the recent up-move, whilst oil is also taking a breather above the USD 50pb level on Brent.

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