We - as well as Citi - previously commented on the broader market complacency in the market wrap. Now it's the turn of SocGen's FX strategist Kit Juckes to make some observations about emerging concerns of "lethargy" both in positioning and moves within the FX space.
Stretched moves threaten lethargy
Last week's CFTC positioning data suggest that speculators are long the euro and long 10year Treasuries. The CFTC data only tell us about a part of either the FX or rates market, and I'm particularly wary of jumping to conclusions about 10year Notes as the wander around in their current range, but even so, the jist of the story is consistent: The inability of 10year US yields to get back above 2.40% and the willingness of speculators to go long even as yields fall back below their 2017 average, is what keeps the 10year Treasury/Bund spread at multi-month lows and EUR/USD bid.
The question, this week as it has been for a while, is whether a market with what seem stretched positions in both bonds and FX, can really take EUR/USD on upwards without some kind of correction? The main focus will be on Thursday's ECB meeting and everyone (as far as I can tell) expects the focus to be on the lack of inflation rather than the case for further tapering of the ECB's bond purchases. There's clearly some reluctance to rock the boat (both in bond and currency markets) at the start of the summer break. That leaves us with EUR/USD 1.1620 as the next technical target, while on the downside 1.13 is the key support. Recent experience suggests we won't get to the support line and will just mess about in this range before pushing higher again.
There's little for the US market to focus on. Empire manufacturing today, TIC data tomorrow, housing starts on Wednesday and Philly Fed Thursday. Positioning ought to put a floor under yields around these levels but I struggle to see how we can generate the conditions for a sharp enough rise to threaten broader risk sentiment. USD/JPY may benefit, and if it does, so might EUR/JPY and AUD/JPY. The BOJ is expected to downgrade expectations on inflation revise upwards its growth outlook on Friday.