Does Speculative Positioning Forecast the Direction of Forex News?


Forex news sentiment among investors in the broader market is generally USD bullish. Primary among these is the Yen, where USD longs are currently $9.5B and therefore account for more than half of overall USD long position at $16.2B. Two other currencies, the GBP and AUD, account for the balance of USD longs. The former has a USD long position of $4.5B, while the latter a USD long position of $5.7B.

This means that USD long positioning is very concentrated among three currencies where there is some expectation of additional monetary easing. This is very different from the views that prevailed in the run-up to QE2, when USD short positions were not only large but also broad-based across the currencies in CFTC’s Commitment of Traders (COT) report.

Long Positions on Easing
USD long positions against the GBP and AUD reflect some expectation of easing in those places. The notable outlier in all this is the EUR, where speculative positioning is now quite long against the USD, while speculative positioning of other currencies is flat against the US Dollar. The forex news sentiment that emerges is therefore much more nuanced than the last time there was a broad market consensus on USD direction, which was in the run-up to QE2 in 2010. Back then the market was short position USD across the board. These results suggest that USD longs may not be as large as they are said to be.

According to Goldman Sachs, overall speculative positioning in the COT report has been long USD to an estimated $20B since early March of this year. Relative to open interest, this corresponds to a USD long of about 17.5%. This USD long position is not all that enormous. Risk-off around Greek PSI negotiations pushed USD long positions to $41.1B last June 2012 (26.8% of open interest). But that episode is perhaps not the right forex news for what is now going on, since those USD longs reflected safe haven buying as opposed to current market drivers and forex news, which are much more focused on differential expectations for growth and monetary policy.

A better compare might be the run-up to QE2 in 2010, when Fed Chairman Bernanke’s speech on the economic outlook and monetary policy at Jackson Hole in August foreshadowed the second round of Treasury buying that was announced on November 3. USD short positions peaked on October 5 at $35.2B (33.7% of open interest). Seen against this benchmark, the current size of USD long positions is relatively modest.

Forex Solutions
Overall, even as forex news sentiment in the market looks to be broadly USD bullish, speculative positioning in the CoT report does not reflect this, with USD longs concentrated against the JPY, GBP and AUD where idiosyncratic factors prevail.

Goldman Sachs recommends on FX:
1.Stay long EUR/GBP, opened at 0.8462 on 8 May 2013, with an initial target of 0.88 and a stop on a close below 0.8350, currently at 0.856.
2.Close short GBP/NOK, opened at 9.20 on 28 June 2013, for a potential loss of 3.4%.


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