Risk reversal sends Forex markets in a spin
Friday 26 February 2021
What goes up invariably must come down again, especially in the ever-fickle world of Forex, and yesterday we saw that day occur as US bonds got dumped after a weak 7-year auction that put some reality check into recent moves in tha market. Cue a sharp reversal in equities, commodities and risk sentiment sending the most recently overbought currencies such as GBP and AUD into a tail spin.
I have been warning for a while that certain moves were getting top heavy but accepting that the market had its own agenda so I'd been stepping back to a a degree. Yesterday proved that patience is a virtue in this game and just going with the flow can often end in tears if you don't really believe in the moves.
Talking of which after yesterday's fall out we have some large options expiry interest back in play today along with the month-end flows that haven't been completed so far this week. Final signals confirm USD supply with EUR and GBP buying against USD and JPY today. The signal in JPY crosses is stronger than for USD.
As always we can't know what has already been completed this week (perhaps quite a bit given the moves we've seen especially in GBP) and what remains to be done today with eyes on the 4pm London fix and flows into that time, especially after the options roll off an hour earlier.
GBPUSD eventually found support at 1.3900 (where we have large options today along with some expected month-end demand) and has rallied to 1.3960 as I type helped by EURGBP failing at 0.8730. EURGBP found a base at 0.8650 then 0.8680 but failing at 0.8730 this morning (GBPEUR support 1.1450) understandably given its strong rally in past 24-36 hours and as GBPUSD finds 1.3900 and month-end support. GBPJPY was indeed top heavy as I thought yesterday but the dip demand failed to appear in the fallout until 148.00 then 147.50.
I remain a GBP rally seller as my preferred strategy but patience a virtue always.
USDJPY found dip demand at 105.80-00 again amid some further JPY supply as per my ongoing warnings and large options interest today with month-end flows in play too and now back up testing 106.50. EURJPY has dip demand again at 128.60 after the retreat from 130.00 and breaking up through 129.00 now as I type. EURUSD finally capped at 1.2240 but finding support at 1.2120 as I type amid all the variable cross-play flows still. Large option interest in play too along with month-end flow. USDCHF failed into 0.9080 helped by EURCHF retreating further but remains underpinned at 0.9020-30 for the moment with the SNB ever-watchful/helpful.
AUDUSD duly capped around 0.8000 and was quick to retreat amid all the bonds/commodity price fall-out yesterday to now test 0.7800 as I type. Another currency,like GBP, that was getting further exended on the topside yet remained underpinned until the proverbial hit the fan and longs were forced to bail out.USDCAD found itself testing 1.2460 yesterday but rallied strongly as oil price and risk appetite weakened and USD demand returned and making good progress to 1.2630 so far.
Tomorrow my mighty Shrimpers return to the hallowed Hall after that massive win midweek and we must hope our recent good form continues against another tough opponent.
Let's continue to be careful out there in all things. Staying safe must be our main priority still. Have a good weekend everyone.
Interbank rates: 08.17 GMT