The latest positioning data gives us a good insight into what currencies the market likes/ dislikes. The latest IMM and CFTC data both reported fresh flows into the euro last week. The CFTC non-commercial flows into the euro are back to 2011 levels, and continue to recover after shorts reached a record low last June. Sterling is still being sold along with the commodity currencies like the Aussie and the CAD.
Nobody loves commodity currencies...
Although the market is still net long the Aussie, the pace of accumulation has slowed. Like the euro, the Aussie saw a surge of longs from June 2012, however, unlike the euro these flows stopped fairly abruptly at the start of the year. The CAD has seen net long positions get cut since September, and was the first of the commodity bloc currencies to see demand start to trail off. This is an interesting dynamic and right now we can infer a couple of things from it: 1, the recovery in the euro has meant there is less need for alternative safe havens like the commodity bloc currencies. Added to this, although their fiscal positions are the envy of some of their G7 counterparts a softening in economic data in both Canada and Australia has weighed on demand for their currencies. 2, The sharp fall in GBP longs that has occurred since January has coincided with some weak economic signals and the prospect of a triple-dip recession in the UK. Hence, the future trajectory of sterling may be dependent on domestic fundamentals going forward, rather than external factors.
This data is not a reflection of the entire market, however it is a reliable indicator of what the market likes/ doesn't like in a market that is not traded on an exchange. The next few weeks will be pivotal for the euro. While investors were willing to cut shorts in the euro and still add to their positions in GBP and the commodity currencies, this stopped at the start of the year (or earlier for the CAD). Thus, investors are adding to euro longs, while scaling back positions in other currencies, even though the sovereign crisis is not yet fully dealt with and a political crisis could occur in Italy after elections at the end of this month.
Some of the longs in the euro may well have been accumulated ahead of the ECB meeting in anticipation of a more hawkish Draghi. As it turned out the strength of the euro was discussed. While Draghi certainly did not talk down the euro, he did mention that a strong exchange rate could boost deflationary pressures, which of course, could warrant as rate cut down the road (that is what the market inferred, anyway). So, with Draghi and co. at the ECB keeping an eye on the euro exchange rate and since they have the with the ability to cut rates (the Fed, BOJ and BOE are pretty much constrained by their very low rates), could long positions be scaled back this week and could the euro be due a bigger correction?
The "Draghi blow" is still being felt in EUR
EURUSD has still failed to recover after the "Draghi blow" last Thursday. Although EURUSD is higher today, 1.34 is acting as a temporary resistance level. The short term bias is lower below 1.3430 - the 21-day sma, while support lies at 1.3340 then at 1.3290. EURGBP is also an interesting cross as Draghi was more dovish than expected, but BOE Governor-elect Mark Carney was less dovish than expected. EURGBP fell sharply from 0.8700, down to 0.8450, where it found good support. This move was mostly fuelled by central banks, so we believe that the next move for this cross will be dependent on the fundamentals and the economic data. EURGBP has recovered today, possibly as investors keep away from the pound until after Wednesday's Inflation Report. Added to that Eurozone GDP is also released on Thursday. A weak reading (the market expects a 0.4% decline) is pretty much expected, but if growth does contract for the third consecutive quarter then we may see some volatility. However, in the short term there may be a recovery back towards 0.86 in the lead up to the UK data, however any strength could be sold into as euro gains could be capped for now.
Today is a fairly quiet day for economic data, but watch out for the Eurogroup is meeting from 0830 ET/ 1330 GMT. It is expected to discuss the exchange rate. These meetings are usually fairly uneventful, but the buzz around currency wars as we lead up to the G20 meeting later this week could cause a few sparks to fly if the euro rate is directly referred to. Elsewhere, at 1300 ET/ 1800 GMT Fed vice-chair Janet Yellen will be speaking on the US economy. She is a noted dove, so her view on the recovery in the labour market, the GDP data for Q4 and the decline in the trade deficit at the end of last year will be watched closely.
One to watch: EURGBP
Source: TRADE at FOREX.com
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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