Calendar Considerations

The stripped-down Phase One deal failed to match early reports and that sparked some risk aversion, but the week ahead is more likely to be about flows and calendar effects than news. Today's US econ data include the Empire Fed (exp 4.0 from 2.9) and Dec Markit PMIs. All major currencies are up vs USD today after the pound was the top performer last week as the yen lagged. The video below shows how GBP has achieved a feat not seen since 1996 and what the JPY has done in 12 out of the  last 25 years. CFTC positioning data continued to show reduced net short in sterling, but last week's positioning commitments (due Friday) will be closely watched to see how they unfolded on Elections Thursday.

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Last week cleared up most of the outstanding fundamentals issues for the year and now market participants will get to the messy business of closing up their books for year-end. The structure of the calendar this year leaves this week as the de facto final week of the year. This time of year makes it tougher to explain day-to-day moves. It is said that seasonal surge in USD demand leads to some short-bouts of USD gains, but none has been seen so far. 

Early trading Monday has included some pound strength that's likely residual and real-money buying post-election. GBP jumped to as high as 1.3422 in the early hours of EU trade before dropping a full cent ahead of what proved to be a disappointing set of UK PMIs (composite slipped to 48.5 from 49.3 vs exo 49.5).

In the bigger picture, there is a tight focus on liquidity into year-end. The Fed ramped up repos purchases, but that might not be enough. Expect a quick reaction from the Fed if there are any problems. At this point, we tend to believe that any 'black swan' that has been well-covered and publicized that it can't possibly come to fruition but we may be overestimating the Fed.

This is also the week when the traditional Santa Claus rally gets underway. Tax-loss selling is usually over after the 15^th of the month so the coast is clear. At the same time, no one has forgotten the massacre in stocks that started at this time last year.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -68K vs -69K prior GBP -23K vs -30K prior JPY -44K vs -48K prior CHF -21K vs -22K prior CAD +21K vs +21K prior AUD -37K vs -36K prior NZD -25K vs -21K prior

The pound net short is about 25% of the extreme levels in August but it's still sizeable undoubtedly some of that cleared out on election night and in the aftermath. The question now is: Can UK Conservatives convince market participants to build a net long position in the pound? A quick Brexit backed up with some growth-friendly initiatives would go a long way.