The major theme today driving markets is consolidation. The biggest movers are the currencies that have seen the sharpest declines over the past month with RUB, NOK and HUF leading the pack. Oil prices are also a touch firmer, which is providing support to the pain trade. Events outside of the US have also helped push the consolidation theme, providing a spark to risk markets.
In Japan, Abe continues to surprise markets with news report indicating that he plans to delay the VAT tax hike by 18 months, which was originally scheduled for next year. What’s more, reports have also surfaced that he plans to dissolve the parliament and hold snap elections next month – December 14 is the mostly likely date.
In Europe, data was a bit firmer with the German ZEW and UK CPI beating estimates. Forex markets remains in well contained ranges but given the lack of tier one data releases and Fed speeches in the US we look for the pain trade to persist.
Indeed, USD net speculative positions (scaled for open interest) remain nearly one standard deviation above the five year rolling average, suggesting there is further scope for the market to tactically take profits on long USD positions (see chart).
We like AUD near term but would fade the rally near 0.8870, which is a strong level of resistance. EMs should also perform well against this backdrop with BRL particularly sensitive to the announcement of the finance minister and Rousseff’s new cabinet.
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