Summarizing The Drivers Behind Overnight's Drastic FX Moves

Confused why the dollar is getting destroyed, the EURUSD is at 1.44 and nothing makes sense in FX anymore? Here is Citi's Stephan Englander attempting to explain it all.

What the market was buying overnight

1) Relief rally after the Nikkei started rising about 9:45PM last night -- there had been investor concern that the 2nd earthquake would intensify production and environmental consequences of the March 11 earthquake/Tsunami.

2) China NDFs moved sharply to the left around 930PM last night, along with spot, perhaps signaling that investors expect China to become more aggressive in using the currency in its inflation battle. In addition the announcement that China would allow the yuan to be traded onshore against a wide variety of assets could be viewed as a step towards internationalizing the yuan. Such CNY moves are very correlated with AUD.

3) Brazil press conference in which the Finance Minister said that BRL strengthening was 'unavoidable' may have been taken as a signal in other currency crosses that appreciation pressures would be hard to fight.

4) The US budget debate is raising increasing concerns about foreign investors that there is no process that is likely to generate needed US fiscal reforms down the road (but note that this could explain USD weakness, but wouldn't be the first explanation for a global risk rally).

5) Investors seem to be re-evaluating the ECB press conference in a hawkish direction. German two year yields are now 1.89%, a cycle high, but we would not think this is the major driver of overnight moves since the EUR is in the pack with respect to gains against the USD.

All of these are legitimate as explanations of the overnight move, but we are concerned that long risk trades in currencies are getting crowded  Yesterday we trimmed the long risk position in our overlay portfolio and our inclination is to continue doing so on further gains. The question investors have to ask is what they know that the market as a whole doesn't and investors seem increasingly positioned for good news only.


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