Trader thoughts - GBP benefits from a broad USD sell-off

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What has been seen on the day?

While it’s been a day of net USD selling, the play of the day is the GBP and to a lesser extent the EUR – we have a broad GBP move all around with GBPUSD getting the bulk of attention and sits nicely above 1.1500 and eyeing the 26 Oct swing high of 1.1638 – no real news that I can see, but 2yr gilts are working up 16bp to 3.23% and there has been some focus on a poor BoE bond sale (QT) which may have impacted gilt yields – while the moves on the day speak to a broad USD unwind, GBP is the pack leader and we see some solid rises in GBP vs the crosses, where GBPCAD sits up 1.5%.

GBPUSD – 4hr chart

EURUSD above parity

EURUSD has regained parity and while EU gas prices have fallen a further 4.5% and Italian BTP/German bund spreads have narrowed again, so it’s hard to pinpoint the flow – clients overall are better sellers of EURUSD above parity, with 55% of open positions held short. One can look at the USD smile theory and assess the right-hand side – where the US exceptionalism story is being called into question, now more from a corporate side, specifically after layoffs have been announced from various multinationals, as well as Apple cutting iPhone output by 3 million phones. The global growth aspect of the ‘Smile’ is still supporting long USDs, but a China reopening – while presumably playing out after the ‘Two Sessions’ in March – would certainly alter that dynamic.

USDMXN looks interesting as a momentum play and eyes YTD lows – we see price lower five days in a row, so consider the Mexican central bank meet this week and are expected to take interest rates to 10% - we get Mex CPI tomorrow (23:00 AEDT) and this should cement a 75bp hike – The MXN is the flavour du jour for so many funds as the volatility-adjusted carry is just so incredibly attractive.

We’re seeing modest buying in EU and US equity indices and maybe this is compelling funds to reduce USD equity hedges – Apple has featured strongly here, trading into $135.67 on open, but has seen a solid bid all through trade and sits just off positive territory – this has supported the NAS100 which is up over 1% now – Keep a vigil on the HK50 again on open, where our flow is skewed heavily long now, and clients are trading momentum in this market.

(Daily chart of SpotCrude)

SpotCrude has found sellers and rejected Friday’s highs – it’s hard to be short at these levels but the rejection of $93.83 is a bit of a red flag– rising trend support is seen at $88.47 and short-term moving average alignment keeps me upbeat for now, but an interesting set-up that may offer a trade on swing timeframes soon.

US midterms in view

We have the US midterms in the session ahead, although we may not get a firm result until later this week – Elon Musk has been out publicly urging followers to support the GOP in Congress – not sure how influential he’ll be, but the betting markets still sense a firm victory for REPs in the House and the Senate – A surprise win for the DEMs in both Chambers to maintain control could get markets fired up, but the other scenarios don’t scream out impending volatility in the USD. Clearly, the US could use fiscal support in the case of a protracted recession which seems unlikely in a split Congress – while the debt ceiling debate, which would be an issue with the REPs in Congress, is not a factor until later 2023.