12 Jan 2016
China fears drive risk-off flows - BofAML
FXStreet (Delhi) – Research Team at BofAML, suggests that the largest China FX reserve outflows on record has kept the markets nervous and China fears are driving risk-off sentiment with flows out of EM Asia & commodity currencies and into JPY and EUR while the sentiment also hits GBP as real money clients reduce a persistent GBP long position.
Key Quotes
“The year has started with a bang, and a sense of deja-vu, as we revisited the risk-off scenario we saw in August last year, with China fears driving sentiment and by extension flows. China FX reserves data for December showed intervention exceeded August levels raising the question whether FX reserve intervention can stem the tide of outflows. The pace of reserve loss will also quickly shift market attention toward the probable composition of further sales, beyond the front end of the UST curve.
USD buying continued, but predominantly vs EM currencies; EUR shorts have been reduced by both hedge funds and real money clients and commodity currencies remain out of favour. JPY’s ‘safe-haven’ status is back in focus, with our data showing moderate buying, and CFTC data showing speculators long JPY for the first time since 2012.
EM Asia the main casualty: Unsurprisingly the focus in FX is skewed towards the EM currencies, in both G10 and EM flows. Hedge fund USD positioning remains long relative to the past year, but buying is vs EM and commodity currencies. EM Asia has taken the brunt of the risk-off move this past week. Positioning is now very short in EM-Asia, but with little on the calendar this week to steer attention away from China, sustained stabilization in China will likely be needed before this stretched positioning corrects.”
Key Quotes
“The year has started with a bang, and a sense of deja-vu, as we revisited the risk-off scenario we saw in August last year, with China fears driving sentiment and by extension flows. China FX reserves data for December showed intervention exceeded August levels raising the question whether FX reserve intervention can stem the tide of outflows. The pace of reserve loss will also quickly shift market attention toward the probable composition of further sales, beyond the front end of the UST curve.
USD buying continued, but predominantly vs EM currencies; EUR shorts have been reduced by both hedge funds and real money clients and commodity currencies remain out of favour. JPY’s ‘safe-haven’ status is back in focus, with our data showing moderate buying, and CFTC data showing speculators long JPY for the first time since 2012.
EM Asia the main casualty: Unsurprisingly the focus in FX is skewed towards the EM currencies, in both G10 and EM flows. Hedge fund USD positioning remains long relative to the past year, but buying is vs EM and commodity currencies. EM Asia has taken the brunt of the risk-off move this past week. Positioning is now very short in EM-Asia, but with little on the calendar this week to steer attention away from China, sustained stabilization in China will likely be needed before this stretched positioning corrects.”