But latest data shows speculators have loaded up massively on USD shorts. Is this healthy?


MAJOR HEADLINES – PREVIOUS SESSION

  • UK Q2 GDP out at -0.8% q/q, -5.6% y/y vs. -0.3%/-5.2% expected and -2.4%/-4.9% prior resp.

  • US Univ. of Michigan Confidence out at 66.0 vs. 65.0 expected and 64.6 prior

  • UK Jul. Hometrack House Prices out at flat, unchanged from last time

  • JP Jun. Corporate Service Prices out at -3.2% y/y vs. -3.3% expected and -3.0% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Gfk Consumer Confidence (0600)

  • GE Import Price Index (0600)

  • Sweden Trade Balance (0730)

  • US US-China Strategic and Economic Dialogue starts (1300)

  • US New Home Sales (1400)

  • US Dallas Fed Manufacturing Index (1430)

Market Comments:

Last week ended with a mild whimper even though US data releases conformed to the recent risk appetite theme, with the University of Michigan confidence survey coming in at 66.0 vs. 65.0 expected and 64.6 prior.
The S&P500 managed marginal gains but the Nasdaq’s recent 12-days of straight gains came to an end. Was this to be the precursor to a slight shift in sentiment?

Meanwhile, GBP took an early hit after UK GDP numbers for Q2 disappointed, coming in at -5.6% y/y vs. -5.2% expected and -4.9% prior. The pressure on the pound continued as we opened in Asia after the weekend following more bearish press at the weekend. An article in the UK Times highlighted that British banks were facing a second wave of big losses as focus shifted to the GBP300 bln worth of lending outstanding to the UK commercial property sector. The article suggested the banks would have to soon bite the bullet and write down considerable losses on tackle this issue, much in the same way US banks have had to. In addition, the FT warned that Europe would have to brace itself for a rising wave of credit card defaults, referring to an IMF report that suggested 7% of the $2,467 bln of consumer debt in Europe would be lost, much of it coming from the UK. In the same theme, UK’s National Debtline said that the number of calls it received from UK consumers worried about loans, credit cards and mortgage arrears had hit 41,000 in May, more than double than a year earlier. Hence GBPUSD slid from 1.6470 at the open to just below 1.64 in short order but was thrown a lifeline by Hometrack housing data which showed UK house prices were unchanged for the third straight month in July.

The US and China start the first Strategic and Economic Dialogue under the Obama administration later today and this garnered some interest from the press. The broad theme will likely remain the US pushing China to not rely on US consumption to power its growth, while China is expected to repeat concerns about how US deficits will impact the value of its USD holdings. Both Treasury Secretary Geithner and Secretary of State Clinton added that few global problems and issues could be solved by one party alone.

While on China, the FT contained an article titled “China’s uneasy embrace of the greenback” suggesting China may seem powerless to wean itself off buying US debt, despite recent rumblings for an alternative which were seen more as a political signal. It notes the PBOC may have no alternative to buying US debt as no other market could handle the volumes involved. This was seen as one of a number of factors suggesting the greenback was set for an up day in Asia.

Fed chief Bernanke was reported as saying that he expects growth in the second half of the year at 1% but cautioned that this would not be enough to bring down the unemployment rate. In his opinion, growth closer to 2.5% would be necessary to absorb new workers and keep the unemployment rate constant. He was also supportive of the US Treasury’s “strong dollar” policy and believed the best way to strengthen the USD was to restore the US economy to its former strength.

Markets in Asia were also talking about the latest IMM CFTC data which showed a massive amount of USD selling in the period to July 21. Currency speculators loaded up on short USD positions to the tune of $7.2 bln with the EUR, AUD, CAD ranking in due order, and now show a total of $16.60 bln worth of short USD positions. Talk centred around the risk of a short-squeeze on such positions given the large one-way position size.

So, Asia looked set to consider a USD buying theme and indeed early trade saw EUR, GBP and AUD all trading lower. However, the Nikkei chose to spoil the party and opened considerably higher, breaching the 10,000 mark and headed for its highest level since October 2008. While reasons for the strong rally centred mostly around strong corporate earnings, there was also an article in the China Daily News highlighting that China’s top decision making body, the Politburo, had pledged to maintain the current proactive, and moderately easy monetary policy into the second half of the year. This is one of the few times where officialdom has spoken so clearly on stimulus. As a result, markets looked to embrace risk again and a stop-triggering squeeze on USD longs was seen by the Asian lunch. We have yet to confirm whether this is a temporary squeeze or it will be “business as usual” for the recovery-themed USD weakness.

Again, there is little data of note on tap today, with German consumer confidence and import prices, Euro-zone money supply the only events for Europe. The US sees new home sales and Dallas Fed manufacturing activity and hence we will likely be on stock-watch duty to determine currency direction.