Positioning
At least within the G10 space, there has been a lack of conviction behind FX positioning of late. In line with the elevated levels of volatility that we have been seeing, the volume of contracts outstanding and positioning within major FX pairings has been underwhelming. However, as central banks now begin to curtail their hiking cycles whilst inflation continues to moderate, outright positioning within currency pairs may begin the rise once again. When we talk about positioning, we refer to reported exposures against currency pairs from specific financial and non-financial institutions that would profit from a rise or fall in a given financial instrument.
Inflation statistics within the US began to come under control ahead most other developed central banks. In response to this the Fed stopped its outsized 50-basis point hikes allowing Euro-Dollar to rise rapidly. During this period of time, short positions were rapidly built up against the US Dollar. However aside from this episode, positioning within the world’s largest and most liquid currency pair has remained overwhelmingly flat. That is of course until now. One of the groups of financial institutions that reports FX positioning to the market is that of ‘leveraged investors’. This group of reporting institutions is often closely observed by the wider market given their ability to shift direction rapidly and solely pursue profit. The most recent data shows us that leveraged FX speculators are positioned for a move higher once again, with EURUSD expected to consolidate above 1.10.
This positioning is consistent with a view that US rates are topping out and coincides with many analyst and bank calls that governmental debt is now a strong buy. To confirm this view, US data will need to continue to be favourable giving little reason for investors to expect a resurgence in inflation. This dynamic adds significance to the US inflation data due in the form of CPI on Thursday and PPI on Friday. Should data continue to point towards a soft landing for US inflation, interest and growth rates, further weight could be added to current positioning allowing a rise higher in EURUSD to be realised.
Discussion and Analysis by Charles Porter
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