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It’s all about positioning

If the past two day has taught us anything about the FX market, it’s that the dollar is more about positioning than trading off fundamentals. We saw that yesterday, with the dollar weakening during the latter stages of the European session, despite better than expected non-manufacturing ISM data in the states. Of course, this was also evident in what we saw in China, with a huge shortage of yuan liquidity pushing up off-shore overnight rates to around 90% in Hong Kong and contributing to the biggest one-day move in the yuan fixing since 2005. We’ve seen some weakening of the yuan overnight, with off-shore overnight rates also falling back down (now around 20%). Investors were generally betting on a weaken yuan, so this is prime demonstration of what happens when you see the mother of all short-squeezes on a currency. This is more problematic given that the on-shore currency is not free floating and the off-shore currency has been plagued by declining liquidity (hence the sharp push higher in overnight rates).

This is not the most favourable backdrop for the release of the latest Employment Report from the US, especially given the annual revisions to seasonal adjustments on the household survey. Basically, this means we are more vulnerable to seeing changes to prior month’s data on the unemployment rate and with it, reversal in the dollar’s initial reaction to the data. The aforementioned tone to the dollar also increases that risk and it’s something that’s often in evidence on employment report releases, namely the tendency to see the initial reaction (strong/weaker) reversed in the first hour of trading after the release. For the record, the market expects a 175k gain in US jobs, with the unemployment rate nudging higher to 4.7%. Note that Canadian jobs data released at the same time as US data.

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