Forex Institutional Positioning Update

EUR Under Pressure As Dovish ECB Risks Grow

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EURUSD

Non-Commercials increased their net short positions in the Euro last week selling further 13k contracts to take the total position to -29k contracts. EUR has been under heavy selling pressure again over recent weeks as US yields have moved higher and the policy divergence between the Fed, which continues to tighten, and the ECB, grows. Political uncertainty continues to weigh on EUR sentiment with both the Italian budget and continued Brexit negotiations worrying investors.

The main focus this week will be on the ECB meeting which is not expected to offer any news, merely a reaffirmation of the bank’s pledge to wind QE down by year-end. However, there are dovish risks and if the ECB gives any indication that QE might run on longer than year-end, expect a sharp sell-off in EUR.

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GBPUSD

Non-Commercials reduced their net short positions in Sterling last week selling 10k contracts to take the total position to-50k contracts. Positioning in GBP has been fluctuating over recent weeks though downside exposure has been gradually reduced despite ongoing Brexit concerns. UK data has continued to perform robustly with the latest wage growth readings hitting a ten year high.  However, the data is unlikely to prompt the BOE into any further rate rises ahead of the March Brexit deadline, especially as uncertainty around the likelihood of May achieving a deal continues to grow. The issue of the Irish backstop remains the key hurdle and one which, for now at least, seems likely to lead to a “no deal” Brexit. However, the BOE has recently said that it might be forced to raise rates in the event of such an outcome to curb spiraling inflation, which might explain the continued buying we are seeing in GBP.

USDJPY

Non-Commercials reduced their net short positions in Japanese Yen last week buying 14k contracts to take the total position to -100k contracts. JPY safe haven demand has been kicking in again following the dramatic declines we’ve seen across global equity markets over the last fortnight.  Recent data from Japan has been stronger than expected, raising the risk of a more hawkish tilt to the upcoming BOJ meeting next week with many players re-igniting the conversations around BOJ normalization which, as yet, has not been discouraged by Kuroda.

USDCHF

Non-Commercials increased their net short positions in the Swiss Franc last week selling further 4k contracts to take the total position to -16k contracts. Last week’s adjustment in the Franc marks the first week of net sales since summer and comes despite the more risk-averse nature to the market over the last fortnight.  One potential reason why CHF has not seen its usual safe haven inflow is down to the news of the erosion of Swiss banking privacy which has spooked some investors.

AUDUSD

Non-Commercials reduced their net short positions in the Australian dollar last week buying 2k contracts to take the total position to -72k contracts. AUD has been under pressure over recent months from the ongoing trade war between the US and China with the market displaying a very reactive tendency. On the domestic front, the RBA is no closer to moving rates higher, continuing to highlight the obstacles which remain in the economy and for now, aside from a dramatic scaling back of trade tensions between the US and China, there is little that looks likely to support AUD.

USDCAD

Non-Commercials reduced their net short positions in the Canadian dollar last week buying 1k contracts to take the total position to -11k contracts. CAD has seen strong buying over recent months as the fundamental backdrop continues to improve. Recent success on the NAFTA negotiations between the US and Canada have paved the way for another BOC rate hike at this month’s meeting, due this week, which the market is now pricing in as a virtual certainty. With this in mind, the focus will be on the forward guidance given by the bank with traders keen to see if the bank is likely to raise again in December.

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