• Risk aversion on the back of EM jitters drove a significant shift in currency positions this week. Investors shifts included short covering in JPY with increased long allocation to gold, EUR and GBP; while the net MXN position was driven deeper into short territory.
• At this early stage of increased risk aversion, investors have the luxury of choosing between the major currencies. Should risk aversion spike materially higher, history would repeat itself, driving the USD higher.
• On the back of risk aversion, investors pared exposure to both short and long CAD, AUD and NZD positions. This is the traditional response. Sentiment remains bearish CAD and AUD and bullish NZD (see table below).
• Investors turned more bullish EUR, as capital flowed away from the EM and towards the advanced economies. There was a similar theme in GBP who also benefitted from improving fundamentals.
• JPY was the greatest beneficiary of EM jitters given the considerable narrowing in the net short position (see middle right chart p2) that was almost entirely driven by short covering—the largest such occurrence in nearly three years.
Read the full report: FX Research
Scotiabank