Date: 27 Oct 2017

It’s the task of the media to provide macro reasons for currency moves but traders will know from experience that sometimes, even if there is a macro-spark, it is a build up of positioning that is the main driver of price action. With that in mind perhaps traders might conclude that Thursday’s post-ECB meeting sell-off in the euro (EURUSD), given that the European Central Bank’s announcements essentially corresponded with market expectations, owed more to the existence of long euro positioning into the event than anything that came out of it. Perhaps long euro positioning into the ECB had been predicated on the risk-reward evaluation that if the ECB was to surprise, it would surprise on the hawkish side, and that when that didn’t happen the currency market had to unload what had suddenly become a stale position.

Certainly, given that the eu had been recently holding up very well versus the US dollar even as the yield on the 10-year US Treasury had spiked higher, and at a time when other currencies such as the Australian, Canadian and New Zealand dollars had been giving up ground to the greenback (AUDUSD, USDCAD, NZDUSD), there’s a decent argument that the level of EURUSD into the ECB was more a reflection of what might develop on the euro side of the equation than what had already occurred on the dollar side. US firm BNYMellon made such a point yesterday ahead of the ECB meeting and might well have felt vindicated given the post-ECB market reaction. But if that is correct, given that the ECB meeting is now out of the way and the market has clarity on the ECB’s intentions, might not EURUSD again become more of a function of the US dollar side of the equation and, more particularly, the changes in US Treasury yields? It’s a thought.

Written by Neal Kimberley, External Currency Analyst.