EUR positioning still leaves potential for EUR/USD upside
The latest IMM data cover the week from 31 January to7 February.
Investors remain very short EUR: Short euro positions have been fairly sticky going into 2012, despite the large spot and option market correction. This is the main reason why we still see upside potential in EUR/USD in the short term. Even though it is unlikely that investors will turn net long EUR as long as Eurozone debt risks remain elevated, a further reduction in short positions should be enough to lift spot further.
Long USD positions are gradually unwound: While EUR positioning remains sticky, there has on aggregate been a decent unwind of long dollar positions – which are now back near +1 stdev from their historical average. The main driver has been a build-up in long CAD and NZD positions and it is worth noting that non-commercial investors are now net long CAD for the first time since September.
Overvaluations building?: With net long AUD and NZD positions back near previous highs and long copper positions back at August levels, the question comes to mind whether the current risk rally has rebuilt past overvaluations? This does not yet appear to be the case. Investors are still fairly long dollar and while the risk/reward from long AUD and NZD positions has certainly looked more attractive than now, CAD remains cheap by most valuation measures and generally, carry currencies should perform in the current environment (note that FX option market volatility is back near pre-Lehman levels).
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