FX volatility is low and positioning is relatively light, even in carrytrades that typically thrive in low vol environments. Most positionsare close to flat, and even large positions, like the $-6.6bnJPY short is at the narrowest it has been in a year and exiting positions,like EUR, are trading at the mid-point of its 52 week range(see bottom right hand chart on page 2). With positioning so lightit suggests that once a catalyst emerges, the currency impact willbe amplified by the building in positions.
CAD is held net short, with very little change over the last severalweeks; suggesting that bears are hesitant to capitulate and are stillweighing on the currency. There were only minor changes in thenet long AUD and NZD positions as well – see table.
Bearish sentiment toward EUR has continued to build, albeit at areduced pace, with a $1.2bn widening in the net short position to$1.6bn. The shift to bearish sentiment is important for the outlookof EUR; a sustained and building EUR short position over the comingweeks will add to the fundamental case for EUR to depreciateto 1.30 by year-end.
JPY shorts reduced their positions heading into this week’s BoJmeeting, moderating the net short to its narrowest level in 18months — to -$6.6bn (see table below and bottom right p2). Thecombination of global risk and domestic developments continue todrive JPY sentiment, having provided for a $10.4bn reduction inbearish sentiment on a year-to-date basis.
Read the full report: FX Research
Scotiabank