Geopolitics in Focus, Euro Short Trade Crowded

The late turnaround on Friday put risk trades back in control but geopolitical concerns remain at the top of the agenda. The Australian dollar is a fractional outperformer in early trading while the yen lags. The weekly CFTC data showed euro shorts continuing to pile in.

Weekend news was mostly benign. On Saturday China reported CPI up 2.3% y/y, which matched the consensus forecast. The m/m results and PPI were also in line with forecasts.

The US launched a number of airstrikes in Northwestern Iraq and Obama said the campaign won't be ended in 'weeks' and that it will 'take some time'. When the bombs first fell on Friday it sparked a surge in oil prices but that later cooled. The timeline from Obama, however, is longer than most anticipated and that could put a geopolitical bid into oil.

The main geopolitical story remains in the Ukraine. Hints at a bid for peace from Russia on Friday were the catalyst for the big turnaround that sent the S&P 500 up 1.15% and sent USD/JPY to 102.20 from as low as 101.60.

Rebels asked for a humanitarian ceasefire on the weekend but it was outright rejected by Kiev, in the clearest sign yet of who has the upper hand. Government forces shelled Donetsk hard and a collapse in the rebel ranks is increasingly possible. The risk is that Russia decides to intervene and then the tables will be quickly turned.

Commitments of Traders

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

• EUR -129K vs -108K prior
• JPY -95K vs -73K prior
• GBP +12K vs +25K prior
• AUD +33K vs +39K prior
• CAD +21K vs +22K prior
• CHF -19K vs +11K prior
• NZD +15K vs +15K prior

In mid-May the euro net was +33K but it has been a rush into bets against the euro since Draghi hinted at negative rates and the TLTRO. Last week he offered the clearest hint yet that ABS purchases are next but euro shorts are already at the most extreme level in two years. A squeeze higher in EUR/USD could quickly put many traders underwater.