Further, CFTC positioning had already shown another large scale profit taking on USD shorts and he feels that markets are likely in the process of neutralizing these positions in favour of JPY shorts. He writes, “It is the stuff of a strange golden age of fx, under invested, over achieving for no great reason, a telltale of a greater instability in the global economy.”
Looking to GBP, he writes, “The fall in GBP or for that matter CAD is leading to a rush for gamma as presumably barriers are taken out.” More fundamentally, he feels that the global system continues to show deep instability. Galy adds, that a UK downgrade had been widely expected and most probably leaked, yet the downgrade had a sizable impact on GBP/USD as it broke cleanly out of the range it held since 2010. More broadly he sees that spot seems to be in the golden age of fx in terms of returns and yet with little reason behind it. He notes, “These are not the days when the Bank of England was 'broken'. These are not the days when the Eurozone was about to fall by the sheer pressure of an elevated EUR/USD in Jan 2010. That didn't make the front page of the FT before it happened (or WSJ).”
More fundamentally, he adds that in an ultra low yield environment, foreigners hold more cash like assets with the BoE holding longer maturities. This makes it particularly easy to reduce holdings of GBP, true both for foreigners and locals. He writes, “US banks for example have a very large GBP exposure given their activity there and far more so than to EM (71bn there see last weekly). The same is likely true for CAD but to a much lower extent. The world lost some of its old anchors of stability namely the demand for illiquid assets from pension funds.”
Looking to Europe, galy notes that the Italian elections are adding their layer of uncertainty for EUR/USD with the first polls out Monday at 3pm Rome time and results much later. Moving to Japan, he comments that if Japanese stories are a good lead, as they are, the head of the Asian Development Bank is the shoe in for BoJ Governor. Private polls had put him at 50 percent and this is quite a bit ahead of the rest of the pack, so it will probably only confirm market expectations.
He finishes by writing “JPY shorts have held well, (but) the risk is if EUR/USD breaks below 1.30 and sends EUR/JPY in a stop loss fest with it. For now, the most likely victim is presumably GBP rather than EUR so that 1.30 should hold. The global economic background remains supportive for risk taking.”