• The market is adding to FX risk and slowly shifting to a more bearish USD stance. There is now a large long EUR position and large short JPY and AUD holdings; with the other currencies looking fairly flat. However this surface evaluation conceals two important themes: 1) Almost all currencies saw an increase in both gross short and long positions, as traders took on additional FX risk; 2) Several currencies have just triggered buy signals by crossing from a net short to net long (GBP this week and NZD two weeks ago) while others are flirting with it (CAD). We see this as suggesting the market is shifting temporarily to a more USD bearish outlook; with the major exception of JPY.
• Post FOMC EUR traders added aggressively to their positions, bringing the net long holding to $11.1bn. This warns of further near-term upside risk.
• The CAD net short position narrowed to just -$0.6bn, essentially flat and suggests that the market is unsure of CAD’s near-term direction. However with a build in both gross longs and shorts it does leave the currency vulnerable to overshooting when it does break out of its range as those that are poorly position struggle to cover.
• Investors remain AUD bears, holding a large net short—a position we agree with moving into the October 1 RBA decision.
Read full report: Market Research
Scotiabank