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- Investors are in risk aversion mode due to the Israel-Hamas conflict, but the dollar may not benefit.
- September’s bumper NFP print is likely an outlier.
- CHF bearishness is building among real money and hedge funds.
- Despite suggestions otherwise, US and EU gasoline demand remains robust.
Is Risk Aversion Good for the Dollar? It’s Complicated…
The outbreak of the Israel-Hamas conflict has investors panicked. Our market risk barometer is inside ‘risk aversion’ territory (Chart 1). Such aversion has tended to benefit USD (Chart 2). However, the dollar is currently experiencing a near-term correction. Why? We found USD benefits from a sharp, strong risk aversion or a grind higher in risk aversion that misses on strong USD downside. We are yet to see the former, so we may need to see our barometer grind higher to halt the dollar correction.
Another Bumper NFP Is Unlikely
September’s bumper payrolls (336k against 170k expected) is likely an outlier. Most of the labour idled by the pandemic has been rehired, and employment is increasingly constrained by labour supply (i.e., labour force, which is equal to employment and unemployment). This makes a string of 300k payrolls highly unlikely. However, as Dominique argues, a string of NFP prints around 200k appears very plausible due to faster growth in the labour force compared with pre-pandemic (Chart 3).
CHF Bearishness Is Building
Net-bearishness is building in CHF as hedge funds (HF) pared net-longs while real money (RM) dove into new short positions. This aligns with our bias to be short CHF vs USD and EUR. Elsewhere, HFs flipped net-long NZD – we think long AUD/NZD will make sense (soon) – while disagreement continues to build in JPY.
US and EU Gasoline Demand Remains Robust
We highlighted the weak motor gasoline ‘product supplied’ data in the EIA report last week – which seems to have shown a sharp decline in gasoline demand. Our view remains that end demand is healthy and this was simply the reaction of fuel stations adjusting their procurement patterns in response to falling prices. This is supported by traffic congestion data (Charts 6 and 7).