Sterling Washout, Central Bank Chatter

The flash crash in the pound will leave the FX off balance for months and central bankers are offering little in terms of clarity or stability. Sterling was easily the worst performer last week while the US dollar and euro were tops. CFTC positioning showed that even a trade that's already hated, like GBP, can still crumble. 2 new Premium trades were issued on Friday.

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Cable finished the week at 1.2463 – nearly 600 pips off the lows but a recovery won't be simple. The drop cleared out speculative longs and it will be months before anyone is willing to attempt to pick a bottom in the pound.

The difficulty in buying GBP is that the inevitable headline shock of the Article 50 announcement is coming. Until those headlines hit, speculators will probably stay on the sidelines and it will be tough for the pound to sustain any rally longer than a few months.

Those won't be the only sources of volatility as central bankers staked out positions at the IMF meetings. Kuroda was notable for comments hinting at the possibility of lower long and short-term rates. He said there were no plans now but the market had been led to believe after the BOJ that the zero-line in 10-year notes was something the BOJ didn't plan to cross again.

Draghi was mum on the talk about tapering bond purchases but said the ECB will reach its inflation goal at the end of 2018 or in early 2019 and that governments know bond buying won't last forever. Reading all the recent ECB comments leaves us entirely unconvinced on any tapering or continued bond buying program but perhaps that's how Draghi feels as he awaits more data.

The Fed's Fischer was back with a fresh round of hawkish hints as he said the Sept decision was a close call. But he also seemed to indicate that there was no urgency to hike in November, saying there was little risk in falling behind the curve.

Coming up in Asia-Pacific trading, China returns from holidays but the calendar is relatively light.

Commitments of Traders

EUR -82K vs -76K prior JPY +69K vs +69K prior GBP -98K vs -88K prior CHF -3K vs -6K prior AUD +25K vs +15K prior CAD -14K vs -12K prior NZD -8K vs -7K prior

Sterling positioning is instructive. The market was already betting heavily against the pound before the flash crash on Friday. It demonstrates that even extreme positioning isn't a signal on its own; sometimes it only says how much the market dislikes something. That said, how much more short-term fuel could the cable bears have?