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Foreign Exchange

IMM data shows stabilization in sentiment

The latest Commitment of Traders report, issued on Friday by the Commodity Futures Trading Commission, showed long positions in dollars were trimmed while the notional USD value of EUR net shorts decreased. Monday trading sees risk correlated FX rally.

USD long contracts were cut back from 117,120 on September 27 to 111,839 on October 4 despite a seemingly USD supportive environment, as spot markets abandoned risk in the first part of last week. Stewart Hall, senior currency strategist at Royal Bank of Canada, expects USD longs to fall further, especially if positive sentiment continues through the front half of this week.

“If speculative interests were willing to cut USD longs in the highly uncertain market environment that constituted the period covered in this week’s report, we would expect that the onset of an improved appetite for risk will be reflected in a further cut to USD longs in next week’s numbers,” says Hall.

Sentiment began to reverse in the second half of last week as the European Central Bank announced measures to ease liquidity in the wholesale markets, curtailing fears of a systemic banking crisis. The risk-on move received another boost as better-than-expected employment data coming out of the US calmed market fears of an imminent US recession.

In EUR, whilst net contracts remained roughly flat around -82,000, the notional value of the aggregate net short position for IMM leveraged funds – the category most likely to run naked directional trades – moderated for the second straight week. The net EUR position fell to around $6 billion, down from $7.9 billion the previous week.

Risk-on move gathers pace

Last week's euro rally seemingly tapered off last Friday, when rating agency Fitch downgraded Italian and Spanish sovereign debt to A+  and AA- respectively, but received a boost on Monday as markets rallied following the weekend's developments. 

News from Sunday’s meeting in Berlin between Germany’s Angela Merkel and France’s Nicolas Sarkozy saw the euro rise against the dollar by the most in over a year, hitting 1.3692 against the dollar 17.00, London time. Sunday's press conference revealed a joint plan to confront the eurozone crisis, envisaged to be “long lasting that would contemplate treaty changes”. The plan would involve a recapitalization of eurozone banks and a long-term solution for Greece – ensuring it stays in the eurozone – by the end of the month.

“The self-imposed deadline for a common crisis response suggests that a major announcement is likely in the next couple of weeks,” says Manuel Oliveri, FX strategist at UBS. “These developments should be supportive of both risk sentiment and the euro.”

The IMM data already shows a retracement of some of last week’s heavy selling of growth proxies which Monday's risk rally continued to build on. CAD net shorts were trimmed to 15,682 on October 4 from 20,550 the previous week, whilst AUD net longs were rebuilt to 12,911 from 5,167, despite the challenging environment.

However, pessimism in GBP remained unchanged, as short positions continued to accumulate. Net shorts rose from 60,010 contracts last week to 68,724 on October 4. The USD notional value of leveraged funds’ net short position in GBP hit a new record of $5.5 billion and open interest in GBP – the sum of long and short positions – also reached its highest level to date.

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