• Expectations for growth stabilization from China and Fed Chair Yellen’s improved tone were likely the key drivers providing for this week’s supportive sentiment shifts toward AUD and CAD, while also simultaneously driving an adverse shift from EUR, reflecting the dual themes of global growth and relative central bank policy. Investors are long CAD, AUD, NZD, MXN and GBP and maintain short positions against EUR and JPY.
• CAD and AUD continue to benefit from improving sentiment on the back of a supportive growth outlook (top left p2), with net long positioning in both rising to levels not seen since H1 2013. For AUD the improvement reflects a steady rise in gross longs, while for CAD the build in longs remains a recent development, with the net reflecting an ongoing trend of short covering (bottom right p1).
• This week’s deterioration in EUR sentiment—to a new 52-week low (bottom right p2)—is reflective of an ongoing trend of building bearish sentiment, where gross shorts have risen steadily since March. For GBP, the largest held net long at $4.1bn—this week’s CPI-driven rally to a new multi-year high likely induced some market participants to position against a currency that we believe to be priced to perfection, while simultaneously providing for profittaking on the part of longs.
• For JPY, a paring back in risk reflects ongoing global uncertainty and a shifting BoJ calculus with an unbowed post-tax tone.
Read the full report: FX Strategy