Goldman Sachs: Note on CTA positioning

[DELAYED, Originally published April 19th, 2024]

An increase in risk aversion has been seen overnight after Israel launched a retaliatory missile attack on Iran, however most moves were retracted fairly quickly as Iran's state media downplayed the incident. , saying that Isfahan is “safe and healthy.” S&P futures fell below 4965, however, they are now back above 5015, EURCHF traded lower to 0.9565 but is now back at 0.9670, and gold rose to 2417 but has returned to 2390. The The greatest movement in the currency market occurred in the USDMXN, which rose to highs of 18.2520; Our traders note that this was largely due to some very large EURMXN barriers across the market, leading to considerable EURMXN buying at a very illiquid time. While this obviously triggered more stops on USDMXN, and Japanese retail flow on MXNJPY, the core of the move was an idiosyncratic EURMXN one, and we believe the magnitude of the MXN move amplified the reaction we saw in other pairs, while which also helps explain why the EURUSD did not really sell off, reinforcing the 1.0600 region as critical support for the pair.

From here, although the stabilization may continue a little longer, it is difficult to imagine much desire to take new risks in the remainder of the weekend. The market will be comforted by the fact that we have seen Israel's response and that it is not as bad as possibly feared, however, the uncertainty over further escalation over the weekend, coupled with the fact that the size of some moves like the MXN has likely triggered a need for VAR-based de-risking, it still means many will be happy to sit on the sidelines until we see how we position ourselves at the start of next week. This morning, the USDCNY fixing rose again, despite the mixed price action for the USD yesterday, and we continue to expect a steady rise here to support USD/Asia as a whole. The 1400 level is seen as a key level for USDKRW, and there is discussion about whether an increase in NPS coverage could help slow the move, however, recent work from our research team showing that KRW is among the currencies more sensitive in the region to higher interest rates in the US, higher USDCNY fixing and also higher commodities, suggests there will be continued headwinds for the KRW in the near term. While geopolitics has dominated in Asia, it is worth noting that the Fed's comments in New York have been increasingly hawkish once again. Williams noted that monetary policy is in a “good place” and when asked about the possibility of increasing borrowing costs, he said it is not his baseline expectation, but added that it is possible if the economic data justify it to reach the target. Bostic, for his part, mentioned that he does not think it is appropriate to relax policies until towards the end of 2024, while Kashkari noted that the Fed could “potentially” keep rates stable all year. As discussed this week, this is largely a recalibration of the Fed's comments to where the market had already moved, however, it reinforces why the USD is likely to remain strong, especially as we head into early summer and we will possibly start to see cuts elsewhere in the G10 space.