FX Yearend themes.
Hi all, I hope you all had a nice and peaceful Christmas.
Today the yearend waves have began to roll in. It started hesitant with risk looking fragile until the NY market got well underway.
There’s supposed to be a lot of rebalancing to be done on this end if year.
First the Wells Fargo model predicting a large bond to equity switch to take place this week. I’m not in the knowing if this is really all to be done but if it were the case I guess we may have seen the first bit of it coupled to some stock, commodity and oil markets short coverage driving risk and the commod currencies higher together withe the USD. A failed 5 yr US auction may be another piece of the puzzle but this one I will be rather scrutinising than trying to anticipate for my trading tbh.
Tomorrow on the 27th the last HIA day of the year and on the 31st another SOMA day as frequently reported by the Nordea crew. That should underpin the USD come the NYK sessions those days.
Lastly are there the usual rebalancing models, which are calling for a very big USD demand emanating from the currency neutral funds due to the largely underperforming US assets. Don’t forget it’s not only a month but also quarter and yearend for a lot of money managers. We could be talking about serious amounts here. These flows should be expected into and around the 4PM London fixing times but seen the state of the liquidity at the end of the year, may get spread around in various lots over the whole trading day.
As one can see, all of this points to USD demand this week into next Monday. Some may have anticipated as we’ve already experienced a few fixing USD buyers last week and today but there should be ample left to do before this year is over. Tomorrow and Friday I would anticipate to be the most active days for those who can to avoid the last day of the year but some can’t and will need transact their flows until the last day’s WME fixing at 4PM London time as that’ s the rate that will be used to reval the books.
If today’s a blue print of what’s to come, commodity currencies should do better than the majors. I’m looking to fade EURAUD, EURCAD rallies as well for some “into the fixing” jobbing activities.
As per our platform, where we discuss all of these in a lot more detail, I’ve started to sell a few cable late on Monday (low 1.27S) and EURUSD 1.1409 on today’s rebound, which have already partially been covered as both dived this afternoon. I’ll be trading the clocks and timings to enter/take some off, keeping a base USD long in place possibly till the final fixing of the year on Monday, depending on how much confirmation I’m getting about all the above. Sticking prices on it in this volatile environment is a bit tricky but 1.1440 EURUSD and 1.2770/80 cable just to name these two would be levels I wouldn’t like to see sustainably break or I would need to reassess.
Last word, and it’s one of caution, great caution! It’s going to be volatile, make no mistake. As banks and providers screw back their liquidity in this period, these rebalancing amounts are bigger than usual, you can easily see how that can end up. So take this into account when trading, adapt your amounts, give some pips leeway to the levels. These flows don’t care about moving averages or fibs. They need to be done. It’s a risk but for us traders also provides opportunities.
Safe travels and happy hunting