The latest CFTC positioning updates showed that the speculative community added to its marginal short dollar position. Indeed after recently peaking in January 2014 the market has continued to scale back its net long USD position, declining steadily for eight consecutive weeks since the late January peak. The broader trend in the data also shows broad-based USD selling, with the four-week moving turning negative in the second week of April for the first time since October 2013.
The key drivers of this trend remain the search for yield (as the drop in US yields persists) and the increased risk appetite (as risk adjusted return in EM and high beta G10 remain attractive). We also note that the data is based on positioning for the week of April 8 so it is likely that short USD positioning gains momentum in the wake of the dovish FOMC minutes last week.
At the same time the data also revealed that GBP and MXN were the biggest beneficiaries of the USD selling for the week ending April 8. The speculative community bought GBP ($1.4bln) and MXN ($1.3bln). The purchases of GBP increased our positioning sentiment index to 100, suggesting that the outstanding net speculative contracts are at the highest level in the past three years (see chart). We also note this is strong signal that market positioning in GBP is over-extended, increasing the odds of a near-term correction. The MXN positioning index increased to 46.3 – levels not seen since June of last year. Even so, at current levels, positioning is not an impediment to further MXN upside. Finally, the CFTC report also showed net EUR selling of nearly $2bln.
The EUR recently continued to fall out of favour with investors after our sentiment index peaked at 85 in late March. It also appears that long EUR is widely held position among macro hedge funds based on the short-term rolling correlation of EUR and HFR Macro Fund returns.
Our FX Scorecard modelpegs the EUR as one of the least attractive in the G10, suggesting that it is best to continue to sell EUR/USD into rallies, especially ahead of the recent high near 1.40.