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Foreign Exchange

Investors reduce EUR exposure ahead of elections; drop lowers chance of slide in single currency

Speculative traders on the CME reduced EUR positions amid political uncertainty as French and Greek voters went to the polls.

The CFTC’s latest Commitment of Traders report shows non-commercial traders on the IMM reduced their short EUR exposure by more than 6000 contracts ($1 billion notional value) between 24 April and 1 May, the second consecutive weekly consolidation in EUR positioning. The EUR net short now stands at 107,000 contracts with a corresponding notional value of $17.7 billion.

The data show that as well as closing out short positions, investors also pared back gross long positions, demonstrating a desire to reduce EUR exposure ahead of the upcoming event risk with Thursday’s ECB meeting adding to uncertainty before the weekend’s elections.

The result of the Greek elections brings renewed uncertainty to the country’s future within the eurozone as neither of the two main pro-bailout parties could secure a majority win in parliament, while the victory of Francois Hollande in the French presidential election raises question marks over the future of Franco-German cooperation.

Indeed, EURUSD fell to a 3-month low of $1.2955 on Monday, after an IMF official said Greece would not receive its next tranche of loans if the recently agreed austerity measures were not finalised.

In Europe, the euro did however manage to stage a mini-revival, however, bouncing back to $1.3050 following reports of sovereign demand and interest from real money and corporates for the single currency.

Citi’s PAIN index, capturing hedge fund positioning, shows exposure was light across most currencies – including EUR – in the run up to the weekend. Analysts say this could be a limiting factor for a sustained move lower in EUR following negative developments in Europe.

“Since the tendency among investors is often to reduce exposure in response to bouts of risk aversion and volatility, already light positioning could help prevent a more pronounced sell-off,” said Todd Elmer, FX strategist at Citi.

Citi''s PAIN index shows flat hedge fund positioning in EUR
Source: Citi

While a move to place fresh short positions on the EUR and other risk-correlated currencies could fuel a further sell-off, investors may be reluctant to run large exposure, given the degree of uncertainty that lies ahead. “Particularly as it is unclear if today’s price action represents the leading edge of a broader trend, this could see investors choose to run smaller positions than might otherwise be the case,” said Elmer.

Elsewhere, IMM data shows commodity currencies remain in favour, with the CAD seeing a $2.6 billion boost to its net long position. The Canadian dollar is now the largest net long versus the US dollar, surpassing the Australian dollar for the first time since early 2011.

The report also shows the bull run on sterling had not run out of steam, as the speculative community more than doubled their net GBP long positions from 7,500 to 16,000 contracts, despite disappointing economic data. The GBP net long now stands at $1.7 billion, the third largest long positions versus the USD after the CAD and AUD.

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