"What A Week": Goldman Says Main Flow Was "Dollar Vs Everything"

What a week... indeed!

This time, as Goldman's Jonas Schmitten notes in an excellent "Just The Charts" noted to cap a few crazy days, there was really only one dominant theme across FX markets - but it appeared in multiple forms and moved quickly.

A key takeaway from the week is the importance of positioning, particularly given how violent price action can be in crowded trades.

As part of Goldman's investment process, they actively track positioning to avoid being caught in the fallout and to identify potential opportunities for a reversal.

As Schmitten notes, starting off, the main flow we’ve seen this week was USD vs everything – a clear break to the YTD trend, which looked more like a continuation of last year.

While the Dollar smile has potentially flattened, it clearly remains steep at the edges...

Which is further shown by the non-responsiveness of more energy importing currencies to the oil spike...

However, on the equity front we see a clear relationship, with stock markets of more energy-dependent economies, suffering more since Feb 27th.

Something we noted last week, was KOSPI’s extraordinary YTD gains and the associated positioning build up (and reduction by foreigners) – which added fuel to the fire and led to a 20% intraweek drawdown...

What does this mean for USDKRW going forward? Historically speaking, KOSPI drawdowns have actually led to USDKRW trading lower in the subsequent days. Below we take the 15 largest 5-day % drops, with non-overlapping windows of 60 days...

Korean equities were not the only place that saw large moves because of crowded positioning.

In front-end rates markets, we quickly went from central bank divergence, pricing hikes and cuts at the beginning of the year, to pricing out cuts and pricing more hikes across the board. However, not all basis points are created equal, as GIR notes here too, with markets where cuts were priced, and whose inflation basket are more susceptible to energy changes, suffering more...

On positioning, markets started to play for lower terminal rates on the back of the AI-led equity sell-off, given the narrative shifted to the deflationary impact of AI and labour market implications...

Are these moves warranted?

It depends on the longevity of the conflict, but more importantly on how long natural gas and crude stay at these levels – which could come down despite ongoing conflict.

Pass-through to the real economy is quick per below, however, it needs to remain at these levels to feed into inflation and expectations...

On specific crosses, ILS performed in line with what we had shown earlier in the year – where ILS strengthens IF the US is involved, and otherwise weakens.

On the other hand, CHF did not perform as a hedge as it usually does in this environment – which we think is in part driven by the USD vs everything theme and, to a lesser extent, the SNB headlines around interventions...

In EM, we’ve seen some interest in fading the vol moves via Double No Touches...

And lastly, where are we going from here?

When is this over?

Markets are starting to price a non-negligible scenario of prolonged conflict and even higher oil prices...

...somewhat of a switch to earlier in the week when most discussions revolved around buy-the-dip given a general feel that this will be over soon...

Professional subscribers can read much more from Goldman's Sales & Trading team here at our new Marketdesk.ai portal