Daily Brief – Don’t forget positioning

Don’t forget positioning

The market’s ability to move in a certain direction isn’t just governed by news flow, sentiment and data. There must also be the financial capacity for market participants, commercial and speculative, to react to that stimulus and buy/sell the underlying asset. If the market has already built up a significant net position in a given asset or security, the stimulus required to sustain that position, let alone add to it, rises exponentially.

This simple logic is something we call positioning. Fortunately for us in the FX market, positioning data is published periodically covering various segments of the market. The most heavily watched is the speculative portion of the market. It’s not because it’s the largest, nor is it the one that’s correct most of the time. Instead, it’s because it represents the ‘hot’ money in the system that can move rapidly and cause significant swings in price.

Looking at the latest data we see two key themes emerging. Positioning within the Dollar has built up once again and is now close to the record highs observed in July. Before the midterms positioning was back up at $44.5bn in favour of the Dollar. We expect a lot of that positioning to have been priced out as a result of the midterm result, with the possibility that this theme may continue to contribute to FX flow in coming sessions. The other notable element amongst positioning is within the Euro. The market is the most net-short Euros it has been since 2016, at -$19.3 worth of non-commercial contracts. With the Dollar stretched long and expensive, while the Euro is stretched short and very cheap, there remains ample room for a technical correction forced by positioning despite fundamentals continuing to favour a lower EURUSD.

Discussion and Analysis by Charles Porter

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