Forex Institutional Positioning Update
GBP Shorts Grow Despite Two-Way Brexit Risks As Barnier Says EU Will Offer UK A Trade Deal
Non-Commercials increased their net short positions in the Euro last week selling a further 2k contracts to take the total position to -7k contracts. EUR short positioning has grown steadily over the last three weeks as the market builds a stronger downside view in response to continued data weakness. The latest inflation data saw both headline and core inflation undershooting expectations and has raised the risk that if data continued to underperform throughout the rest of the year, the ECB could end up keeping QE in place beyond its currently projected end point of year-end. A light data calendar this week should see US trade rhetoric playing the main role in EUR price action as the market faces the risk of Trump signing off on the next round of Chinese tariffs.
Non-Commercials increased their net short positions in Sterling last week selling a further 5k contracts to take the total position to -77k contracts. The GBP short position continues to grow despite positive news last week from the EU’s Brexit negotiator Michael Barnier who said that the EU is prepared to offer the UK a trade deal. However, divisions within the UK government still pose a significant risk to a deal being agreed and focus for now turns to the domestic political environment as MP’s return from their summer break and head into the Party Conference season. Focus this week will be on Mark Carney and his colleagues who are due to testify in parliament on Wednesday following the bank’s most recent rate rise. Traders will be keen to hear any clues as to whether the BOE is likely to hike again this year.
Non-Commercials reduced their net short positions in the Japanese Yen last week buying 1k contracts to take the total position to -46k contracts. JPY has been under steady buying pressure over the last month with investors’ net short positions having been reduced by around a third. The spike in JPY purchases can be attributed to a rise in safe-haven demand given the rise in geopolitical tensions linked to the economic crisis in Turkey and the ongoing trade war between the US and China. Indeed, the BOJ has revealed that it is conducting an emergency survey of companies in each of the country’s 32 districts to better understand the effects of the trade war on exports and supply chains.
Non-Commercials reduced their net short positions in the Swiss Franc last week buying 3k contracts to take the total position to -45k contracts. The widening Italian BTP: German Bund spread which is near 3% has seen steady selling in EURCHF, which continues to move lower into levels not seen since last year. Speculation is now growing as to which level the SNB will choose to intervene and start buying CHF given that the bank continues to reaffirm its commitment to maintaining a presence in the market to avoid excessive CHF strengthening.
Non-Commercials reduced their net short positions in the Australian Dollar last week buying 5k contracts to take the total position to -45k contracts. Despite risks from the downtick in global growth and the remaining obstacles in the domestic economy, AUD has seen steady buying over the last three weeks though this has not been reflected in the price action as AUD continues to hit fresh lows against USD. Indeed, Westpac’s recent decision to independently increase mortgage rates citing the structural increase in wholesale costs has further muddied the water for the RBA which isn’t expected to raise rates until mid-2019.
Non-Commercials reduced their net short positions in the Canadian Dollar last week buying 2k contracts to take the total position to -25k contracts. CAD is currently under the strain of opposing forces. The positive input from expectations around a potential “NAFTA 2.0” agreement are battling it out with recent data weakness headlined by the slight miss in 2Q GDP. With this in mind, the market has largely priced out a rate hike at the upcoming September BOC meeting this week though is expecting the bank to signal a move in October.