Deutsche Bank - "US real yields have relentlessly marched higher since May. Some may be surprised by the recent ack of broad dollar strength, but one needs to recall that low real yields since late 2008 were manifesting themselves most in a weak dollar against commodity/$-bloc currencies (notably AUD and NZD) and emerging currencies. Therefore, a change in the real yield trend should most directly translate to dollar strength against those currencies, and indeed that has been the case. With…

Were you aware of this?... I was not... interesting

Francesc

Deutsche Bank - "Adjusted for volatility, China now offers the highest FX carry in the world. As a result, there has been a surge in flows into the CNY(and CNH) by both onshore and offshore entities. The performance of the carry trade is now reaching levels seen before unwinds of major carry trades of the past: AUD/JPY pre-Lehmans, and USD/JPY in 1998. Some combination of higher US yields, regulatory…

Deutsche Bank -

"- Trendiness has fallen from its peak, reflecting the dramatic reversal last week. Unsurprisingly, realized vol continues to pick up. Uniformity remains at very high levels, however, suggesting that dollar moves are still driving all currency pairs.

There are clear macro and market drivers of FX markets again after a period of several weeks when currencies were not correlated in aggregate to any single variable. These reflect a clear regime shift in…

Deutsche Bank - "Next week will be quiet data wise and markets may use the opportunity to begin their summer hibernation.

However, US data is still central given the debate over Fed tapering and Thursday’s retail sales number will take prominence. The China data dump over the weekend and Tuesday’s BoJ meeting will be the other highlights.

On the wider docket we get the RBNZ meeting Wednesday. No further action is anticipated. Concerns over the overvalued currency should have been…

Deutsche Bank - "another story in the making this year is euro outperformance despite dollar strength. We think this has more to go, with the majority of EUR-crosses trending higher on a multi-year basis. We see three drivers:

First, most of the valuation correction in EUR has taken place. (...) Second, Europe is exhibiting a number of Japan-style dynamics that are beneficial to the currency. (...) Third, the rest of the world just doesn't look that good.

(...)  In sum, we…

Deutsche Bank - "In recent weeks dollar long positioning has become extended as the market anticipates Fed tapering on the back of stronger US economic data. As a result, US data, particularly labor market data, has taken on renewed importance and may add considerable volatility to currency markets for the remainder of 2013.

Overnight EUR volatility is indicatively pricing 2x the volatility around next Friday’s NFP print relative to a “normal day” (e.g. inferred from 1m volatility).…

Deutsche Bank - "We believe the market remains under-positioned for what we expect to be a once-in-a-generation move in the USD over the course of the year, as well as big moves in rates.

First, real yield differentials between the US and the rest of the world have already turned, suggesting the US trade-weighted dollar should be at least 7% higher from current levels.

(...) Second, the market continues to be too complacent on the US rates path, particularly in the short-end. One…

Deutsche Bank - "After a period in the doldrums, FX has spent the last 6 months front and centre, and the relative implied vols for different asset classes bear this out. DB’s CVIX 1m implied FX vol measure as a ratio of 1m implied Bond vol (the MOVE index) is up in the 99th percentile for the last 19 years. The CVIX1m / VIX ratio is in the 93rd percentile.

There is some sense that the Fed is an important part of this vol divergence. The Fed is squashing bond vol notably at both extremes…

Deutsche Bank - "Macro conditions for B/Es have improved somewhat with commodities stabilizing and economic data on balance surprising on the upside again. Just like for the US and the euro area, our B/E momentum score appears to have bottomed, while remaining in negative territory. Some further confirmation of these trends will be needed in the coming weeks.

In the UK, an additional headwind for B/Es has been the renewed strengthening in the exchange rate. A sideways trend in…

Deutsche Bank - "Spring time trends in 2010, 2011 and 2012 were partly the result of bouts of risk aversion triggered by seasonal data weakness and Eurozone blow-ups. However, monetary policy divergence also played an important role, with the distance between the highest short-term interest rate and the lowest in G10 rising significantly, in line with currency trends. At the time of writing, there is scant evidence of this phenomenon so far, but we think this will change. Firstly, deflation…

Deutsche Bank - "We think there's one EUR driver that matters and two that don't in coming months. We don't think ongoing strength in Euro peripheral fixed income matters.

(...) We don't think a potential ECB refi cut today matters much either.

(...) In contrast to the above, we do think Eurozone disinflation risks (and how the ECB responds) matter. The ECB primary mandate has fallen out of focus in recent years, best reflected in the steadily declining mention of "price stability"…

Deutsche Bank - "Though sentiment may appear to be positive towards the US and the dollar, actual flows, positioning and views imply the opposite. Our dbSelect positioning indicator shows investors are short dollars. These short positions are larger than those seen in the euro, where investors are close to their smallest shorts in a year. Consensus analyst forecasts show a close-to-unchanged dollar profile against the majors this year and beyond.

Perhaps more importantly, when we look at…

Deutsche Bank - "The past week delivered at least 5 interesting and sometimes contradictory messages, that deserve special ‘dissection’ for clues on this coming week’s market activity. They include:

1. More first tier data hinting at greater US fiscal drag than previously believed.

2. US equity resilience/outperformance, with (normally contrarian) sentiment AAII indicators far from bullish.

3. More DB Select evidence suggesting the yen short is modest.

4. Gold’s ongoing…

Deutsche Bank - "EUR/USD is also in a technically corrective phase, and is the most difficult major pair to ascertain what it is trading off: risk or rates, buoyed by reserve recycling, or, buffered by EUR cross trades? The next level for EUR/USD shorts is near 1.3150, but this is a pair that is in search of a clearer rationale before positions will be put on in size. Lastly, negative views on commodities are much better played through commodities than commodity currencies that continue to…

very interesting....

Francesc

Deutsche Bank - "We don't believe the last few days' EUR/USD squeeze has legs and remain bearish for three reasons.

First , we think the market is under-estimating the dovishness behind last week's ECB press conference. Had it not been for the more than +10% decline in euro Brent prices in recent weeks combined with exceptionally weak domestic price pressures, Draghi's increasing discomfort with the inflation outlook would be of lesser…

Deutsche Bank - "The ECB has been unable to reach any consensus on non-conventional monetary policy measures despite expressing concern over the past few months on the effective transmission mechanism to small and medium scale enterprises. With this limitation and against the backdrop of weakening data the ECB’s dovish tone could only be reflected by a greater willingness to cut the refi rate by saying that they will “monitor very closely” economic developments. This has resulted in a rally…

Deutsche Bank - " Trendiness has hit rock bottom in G10 FX. In 2012 and 2011 periods of trendlessness coincided with data surprises beginning to disappoint in spring after positive start to the year. Given this and the uncertain macro and political backdrop, we believe that markets could remain trendless for some time. Uniformity between currencies also remains low, and realized vol is near recent highs. Pause before adding risk.

Relative growth, as measured by PMIs, is the clearest…

Deutsche Bank - "First, we believe the policy response in Cyprus has been very counter-productive. As of today, freedom of capital movement is suspended in Cyprus. Economic and Monetary Union across the entire Eurozone no longer exists.

(...) Second, we've been negatively surprised by political developments. It is looking increasingly likely that Italy will be heading towards a second general election, with an unpredictable…

Deutsche Bank - "there appears to be a growing understanding among the most influential Fed members that a tapering of QE bond purchases may be preferable to a hard stop. A Dudley- style QE ‘dial down’, with an option to dial QE back up on slower data, should in theory further curtail risk. In practice, it could underpin the broad risk cycle, but add to short-term volatility as the criteria that would motivate policy flexibility is unlikely to be transparent or predictable. Nonetheless, such…

Deutsche Bank - "Our positive view on equities is based in part on an upside surprise in real GDP growth in the euro area, led by Spain and Italy. In February and March the PMIs have declined, and it is reasonable to question whether our positive GDP growth view is still valid. We believe that it is.

In our view, the fundamental case for a reco very is still strong. Credit growth remains sharply negative, bank regulations have eased somewhat, inventory de-stocking was even more…