Before The Drama Of US Payrolls On Friday

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Before the drama of US payrolls on Friday, markets will have to weave and bob the month and quarter-end mid-week. According to DB, Pension fund rebalancing estimates point to outflows from large-cap equities into bonds. 

While the month-end may have less of an impact than usual, it may speed break investor activity. I also think the upcoming July 4 holiday in the US is likely to have a more significant impact given that it falls on a Sunday so that Monday is a US holiday. And this could mean that participation is lower on Friday as some investors take a long weekend. In turn, this could lead to broader moves in either direction if, indeed, holiday liquidity conditions prevail.

The US dollar found a base on Friday well ahead of the critical pivot of 1.2000 in EURUSD. As month-end approached, choppy markets could prevail given the big moves this month in stocks and fixed income. So, I suspect FX price action will be mostly driven by month-end rebalancing in the next few days. 

The market has pared back long FX exposure though the scale of the shift post-Fed seems relatively tiny versus the price move on DXY. EUR has opened up a small, short position, while JPY shorts remain large and sticky. The market is still long NZD and CAD, though marginally lighter.

THB remains the most prominent short in Asia, with concerns around the Delta variant hurting the Kingdom’s outlook on recovery in tourism. Since mid-last year, the sticky long CNH positioning has finally flipped (too small, short) after the Fed, as has the market’s long INR exposure. TWD and SGD are the only remaining meaningful longs in the region, with the former likely supported by the unwinding of shorts used to fund exposure in CNH.

There was no runaway inflation - PCE below expectations initially weighed on the US dollar, but it steadied, slowing gold’s advance last Friday. Commodity prices rose though there was a lack of an immediate impetus to buy bullion. Near-term support lies at $1760 and resistance at the 100-day moving average. Volatility will stay low unless the spot breaks $1800 on the topside. In the meantime, gold will probably chop around within current ranges anchored to the hip of the US dollar.