BNP Market Talk: FXWW

From the FXWW Chatroom:

BNP: • Large USD short positions currently held by investors could be squeezed in the coming week as a result of progress on US tax reform and a tightening of USD liquidity.
The market will focus on the last two G10 central bank meetings of the year, held by the Swedish Riksbank and the Bank of Japan.
USD squeeze higher into year-end
In the week ahead we expect progress on US tax reform to be the main driver of the USD. In our view, tax reform is likely to be passed next week following the reconciliation of the bills from the House and the Senate. The tightening of USD liquidity, reflected in a widening of the EURUSD cross-currency basis, may also provide support to the USD. Statistical analysis suggests that a tightening of USD liquidity tends to lead to a shift in USD FX positioning. The USD appears the largest short in the G10 space according to BNP Paribas FX Positioning Analysis, with a score of -26 (-/+50 scale). We see plenty of scope for these short positions to be squeezed before the end of the year and for the USD to rise. We remain positioned long USDCHF targeting 1.02.
Next Wednesday, the Swedish Riksbank will decide on the future of its QE programme, while the market largely expects the Bank of Japan to keep policy on hold on Thursday. This means that the Riksbank is much more of a risk for SEK than the BoJ is for the JPY. Finally, the UK parliament is set to vote on putting the 29 March 2019 exit from the EU into law next week, which may provide another test for Prime Minister Theresa May and her cabinet.

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