IMM: USD shorts deepen to $11.7 billion as markets build long EM exposure

The latest Commitment of Traders report, issued by the Commodity Futures and Trading Commission, shows the value of the net short USD position at $11.7 billion – the largest in 13 months – in the week to September 11.

Net short EUR positions continued to shrink to $15.1 billion, the smallest net and gross short positions since April.

However, the EUR’s rally above $1.30 since Tuesday suggests more short covering in the single currency and the creation of new long positions in the market, says Marc Chandler, Brown Brothers Harriman’s head of FX strategy.

As a result, Chandler says he expects next week’s IMM report to show a “more dramatic reduction” in the EUR short position as new length in the market is established.

Meanwhile, some strategists claim new long positions in EM currencies, such as the MXN, and commodities currencies, such as the AUD and CAD, could leave them vulnerable to a correction.

EM and commodity-linked currencies increased in value after the Fed’s QE3 announcement, as the prospect of more US stimulus boosted global risk appetite.

The IMM data showed the net speculative AUD long position grew to $7.12 billion, or by 68,300 contracts, last week. However, the move centered on a covering of short positions rather than a change in the net gross longs, says Chandler.

“The Australian dollar’s technical condition is weaker than one might suspect, given the risk-on market flavour,” says Chandler.

The CAD exhibited similar behaviour to the AUD, leaving it “technically vulnerable”, says Chandler.

The CAD net long position hit $10.5 billion on September 11 in a move that broke the October 2007 $8.2 billion record when USDCAD was trading at C$0.95 on the way to a low of C$0.9058.

Scotiabank chief currency strategist Camilla Sutton says the CAD is at risk now of “violent upwinds”.

“Positioning like this highlights that sentiment is bullish CAD, but it should be watched closely for warning signals that sentiment is shifting,” says Sutton.

In MXN, there was a $4.7 billion rise in the value of the long position last week, reflecting a growth in the net speculative position by one-third, or by 122,000 contracts.

Around 5,700 short MXN contracts capitulated last week, leaving only 4,000 short MXN contracts in the market, the least since May 2011.

With many leading central banks showing continued willingness to foster a risk-on environment in FX markets in the months ahead, many traders are now seemingly well-positioned having added to long positions in key hedges, such as AUD and MXN.