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Foreign Exchange

Long dollar positioning hits 2011 high

Speculative investors raised their bets on further dollar gains to their highest level this year amid fears over the escalating European debt crisis and its potential effect on global growth.

Positioning data from the Chicago Mercantile Exchange, widely used as a proxy for hedge fund activity, showed most of the activity was against the euro as tensions in the eurozone increased. Net short positions in the euro reached 104,302 contracts in the week to November 29, an increase by almost 20,000 from the previous week. The dollar value of euro shorts stood at $17.4 billion, within spitting distance of the record $18bn net short seen in May 2010.

Aside from the euro investors increased their sterling short exposure by more than 10,000 contracts as market fears in Europe increased. The net short in sterling was calculated at 46,660 contracts.

 Long dollar positions close to 2011 highs

 
 Source: CFTC & Scotia FX Strategy

The latest report showed speculative investors marginally cut back yen long exposure by 2,633 contracts, though the market remains net long by 40,547 contracts.

CHF, where investors have been largely neutral since the imposition of the exchange rate floor by the SNB, saw a 50% rise in short positions, bringing the net short to 9,327 contracts.

Global growth fears and impending rate cuts from the Reserve Bank of Australia and the Reserve Bank of New Zealand also saw investors cut back long positions in the commodity currencies.

The net long in the Australian dollar fell by 5,418 contracts, bringing the totally net long to 12,452 contracts. Similarly, long positioning in the New Zealand dollar approached neutral levels of 3,718, down from almost 8,000 contracts the previous week.

The value of the net short position in the Canadian dollar increased to $2.6bn, the largest short since the summer of 2008.

The massive short position explains the swift rally in risk correlated currencies on Wednesday after the surprise decision by global central banks to ease the cost of dollar funding.

“Given how short-risk markets were heading into this decision, it is no surprise that the move to the upside was so violent and next Friday's data will likely show a complete different picture, barring stunning failure in Franco-German talks this week,” said Geoffrey Yu, FX strategist at UBS.

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