As documented in Monday’s kickstart, it’s all about the (slow) unraveling of the reflation trade this morning.
The latest CFTC data (for the week ended Jan. 17) showed specs trimming their Treasury shorts a bit, but positioning remains extreme fueling fears that a reversal could be violent (i.e. a sharp move lower in yields).
The dollar is the story of the day so far and the trade is basically all about what comes out of Trump’s mouth or the mouths of his inner circle. In other words, it looks like anything they say is going to be seen as verbal intervention in FX markets whether they intend it or not.
This pretty much says it all:
Below, find the latest commentary from SocGen:
There wasn’t enough about fiscal policy, tax cuts and infrastructure spending in President Trump’s inauguration speech on Friday to encourage Treasury bears. Instead, the message was combative, protectionist and isolationist, while the media focus was on the size of crowds and the women’s movement marches in the US and elsewhere. Treasury yield are lower this morning and given the scale of the speculative position on the futures market, the concern must be that the correction goes further. That doesn’t change the long-term story in bond-land but with FX still being driven by real yield differentials, we are likely to see a further clear-out of dollar longs (though these have been cut back a lot already).
The instinctive reaction of markets to a more isolationist/protectionist world is to favour the currencies of countries with large current account surpluses, as these are the winners if capital stays at home. That may be too simplistic, but the yen and Euro are natural initial winners.