Fair weather friends

[09/09/25]

Local politics have served as a distraction from the Fed independence/US exceptionalism/tariff roll-out themes through the summer. Be it Turkish CHP leadership/Indonesian Finance Minister removal, the Ishiba resignation in Japan, UK Labour misdemeanors/pre-budget reshuffle or the collapse of Bayrou’s government in France, the market has not been short of idiosyncratic themes to get its teeth into, whilst the ‘tier1’ theme stalls. ‘Fiscal dominance’ - not mutually exclusive from the above events - is a term used regularly and necessarily, given the rising back-end yields most developed economies are experiencing.

This week, following the Ishiba-inspired gap lower in the JPY on the Wellington open, market participants (who had spent Friday afternoon selling USDJPY into the 146.80/147.00 sticky zone) received a body-shot (>148.50), which I believe lessened appetite to sit long EURs into the Bayrou confidence vote and a potential Macron resignation gap during the past 24hrs. The JPY is now notably firming, with far less participation, as the event enters the rear-view and I suspect the EUR is now poised to breathe a similar sigh of relief. Even the pound is enjoying a brief reprieve as speculators realise we have a long wait until 26th Nov - yet another signal that political disarray doesn’t necessarily equate to currency destruction… yet.

We are of course not out of the woods from a French political standpoint, but this does not mean we cannot price-out some of this risk premium; ideally proxied and accompanied by a calming of fixed income spreads.

Although I have the EURXXX exposure in EURCHF, I have been sleeping on the idea of the short USD component that many already have on their roster. On the USD side of the equation, I had seen 25-28bp for the Sep Fed as fair if not mature and so had been waiting for either momentum resumption, a clear September ‘back to school’ story and/or US data confirmation. I think the US data confirmation arrived on Friday (I had expected a 25-50k headline to be clouded by a ‘better’ UR of 4.1%, which it wasn’t) and see this EURUSD trendline break depicted below as being an embryonic and liquid version of the development in the gold market of late. Rather, I am seeing decent asymmetry to play for the break here vs. the other USD selections in the G10 space, given what are now clearly defined levels to me. It is not a familiar experience to be engaging with something at the extremes, but I think the exception can be made to add a USD-lower component as I construct, given how powerful a driver it was through H1 and how under-owned I now sense this trade is. Should EURUSD reverse - whilst frustrating, I will be comfortable that it was a worthwhile play and one that would form the foundation of a USD lower basket, should the theme resume.
The clear risk in the short-term that can extinguish the view quickly is that today’s BLS revisions are not as negative as we expect, which could stifle the momentum as quickly as it had built, but I would prefer to establish the risk ahead of the release. On the US CPI front, I am happy that a hot print, given the Fed blackout, will see USD supply into any rally.

Trade expression of choice:
Long EURUSD (spot) 1.1750. S/L 50% 1.1650 (trendline relapse), 50% 1.1530 (100dMA pivot since Nov’24)
i.e. S/L average is 1.1590; risking 1.4% on the view
T/P 1.2100

Update [17/09/25]

Selling 50% of EURUSD long at 1.1850. S/L at average entry 1.1650 for the balance of 50%. Margin usage for this trade therefore reduced from 4% to 2%. 
Crucially, I don't understand why the momentum has built in the 48hr pre-Fed, when we have had a series of what I had interpreted to be negative US data releases over the course of the prior week (PPI, CPI (Core PCE 0.18-0.20% read-through), IJC (Texas or otherwise), U.Mich, NFP revisions of c.900k and Empire Manufacturing), yet the USD had displayed absolutely no interest in following US rates nor taking direction from XAU. Ironically, a US retail sales beat coincided with the momentum resumption!
That said, be it FOMO/pre-meeting positioning or systematic flow driving the move, I believe it prudent to reduce the risk into this pre-Fed rally in EURUSD. I don't plan on 'actively' trading around the levels communicated on these longer-term ideas, but watching the moderation in AUD, XAU and ZAR pre-meeting, and recognising the macro data dislocation, I would like to adjust here. To cover the eventuality that this is indeed the USD break we have been waiting for, the TP on the balance will remain at 1.21. 

For colour - examples of hawkish outcomes over the Fed on the radar:
- The use of the word ‘insurance’ accompanying a 25bp cut
- No adjustment in the ‘25 dot from 3.9 down to 3.6
- Powell playing-up labour supply issues and highlighting uncertainty on the b/e unemployment rate
- No lowering in PCE long-run projection from 3.1 (i.e. unchanged, despite CPI/PCE read-through mentioned above)
- Cook, still voting, ‘rebelling’ with a dissenting ‘hold’ alongside Schmidt (NB unlikely!!)

Good luck out there!

Update [26/09/25]

The remaining 50% of EURUSD balance stopped at 1.1650 yesterday evening. The cocktail of US curve flattening, improving US data and a cleanse in legacy USD shorts takes us out of the position. Happy with the risk management pre-FOMC and ultimately hold a longer-term USD bearish view, but respecting the price action and the trend-line break/levels.

Overall cost of trade (carry; as stopped at average entry) 9bp i.e. -0.09% on 2% margin usage