Recent CFTC data for the week ending April 17th showed a continued build up in carry trades with EUR net long positions now at 106,770 contracts, an all time high, while JPY net short positions increased from 64,841 contracts to 70,519 contracts, according to a report by BNP Paribas.
In line with this build up in positioning, ECB’s Trichet warned at the EcoFin meeting that there are “two-way risks in any bet†while ECB’s Garganas was quoted in Greek newspaper To Vima that a strengthening euro could do the job for the ECB by scaling down inflationary pressures, making “new interest rate increases…more distantâ€.
Interestingly, this follows comments from ECB’s Constancio last week that the ECB was closely watching the EUR’s rise. If carry trades come under downside pressure, which the FX market seems to be signalling, then EUR/USD could face pullbacks in the near-term.
There has been mixed news out of Japan. On the one hand, S&P raised Japan’s debt rating from AA- to AA, owing to government’s efforts of fiscal consolidation.
This was the first time S&P had increased Japan’s long-term currency debt rating since it assigned a AAA rating in 1975 and after having downgraded Japan’s rating three times in 2001 and 2002.
On the other hand, the FT reports that Japan’s Pension Fund (GPIF) which holds assets worth USD 1.4tr was looking at more active investment strategies in order to increase its return. However, as Japanese household balance sheets also show, the issues of Japan’s pension funds are structural and hence news such as this is likely to have a temporary impact on the FX market.
Sterling’s corrective pullback following the weaker than expected March reading of UK retail sales has proved to be limited and short lived. Indeed, although March retail sales rose only 0.3% m/m, falling short of the 0.5% m/m consensus, February’s data was revised higher to 1.6% m/m from the 1.4% m/m previously reported. Also the retail sales deflator rose to +0.4% y/y in March from -0.3% y/y in February, highlighting that March sales were not driven by discounting but rather healthy consumer demand. It also suggests that retailers are confident enough to raise prices.
The UK’s Industrial Relation Services survey showed that pay increases were at an 8 year high at 3.5% in the three months to March. The IRS report also showed that 206 out of 261 pay deals covered in March included an increase to basic pay, highlighting the need for continued BoE vigilance.
This comes in line with the market having nearly fully priced in a rate hike for May.
