Risk on as Germany Hints at Turning Taps

Germany is under increasing pressure to abandon a balanced budget but the hints so far only indicate a willingness to act after a recession is assured. By then it will be too late. What about the solution of talking down the euro? See more below. CFTC positioning data showed a shift into the yen (see chart below), with the highest net speculative net longs vs USD since autumn 2016 when USDJPY fell below 102. A new Premium trade has been issued today ahead of this week's highlights-- Wednesday's release of the FOMC minutes from the Fed meeting (7pm London) and Friday's Powell speech at Jackson Hole (3 pm London with the possibility text released 90 mins earlier). More detail on these in this week's Premium video coming up tonight.

Germany's Finance Minister said on the weekend it could deploy up to 50 billion euros in extra spending if needed. It was more of an assurance that the government has ammunition and not a promise to start preparations. Germany is essentially the battleground and the tipping point for looser fiscal policy in Europe and perhaps the rest of the world. If the bond market is right, it might be the final chance to avoid a deep global slowdown.

FX Solution to German Problem not a Done Deal

From the German perspective, some may posit the economic challenges might be better solved with a weaker euro. The weekly close on Friday was a two year low but German manufacturing is in a slump. A deeper fall would be a 'cheaper' way to engineer stimulus. The risk is that it sparks retaliation from the White House, or forces Beijing to devalue further to compete. Another problem is: Can the euro fall substantially from here, when it's: i) used as a funding currency to finance carry trades and rises on risk aversion; ii) the biggest FX region presenting trade CA surpluses.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -47K vs -44K prior GBP -96K vs -102K prior JPY +25K vs +11K prior (Biggest since autumn 2016) CHF -13K vs -16K prior CAD +14K vs +24K prior AUD -63K vs -55K prior NZD -13K vs -12K prior

The yen position has switched to net long 25,000 contracts from short 4,000 contracts two weeks ago. The net long is now the largest since November 2016. An interesting contrast is the Swiss franc. The market is so far reluctant to bet on it; perhaps owing to fear of the Swiss National Bank.