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Foreign Exchange

Investors rush to havens as eurozone woes intensify; speculators abandon EUR, AUD

Currency speculators on the CME turned to the dollar, yen and sterling, as concerns over Greece’s fiscal crisis and worries over global growth pushed investors toward safety.

The euro and the Australian dollar were sold heavily, as growing pessimism pushed both currencies out of their recent ranges. The latest Commitment of Traders report, issued by the CFTC, showed investors raised their net long positions in the dollar by $8 billion to $19 billion in the week to May 8, as an indecisive election result in Greece raised expectations over a Greek exit from the euro and fears of a slowdown in China weighed on sentiment.

 Source: CFTC, Data Insight, Scotia FX Strategy

Investors also added $887 million to their long positions in sterling, which is seen as a refuge from the eurozone debt crisis, taking the net value of their long positions to $2.6 billion.

Meanwhile, the net short position in the yen was trimmed back by $1.4 billion to $6.4 billion.

The euro proved to be the least popular currency, as the news from Greece, as well as the victory of François Hollande in the French presidential elections, pushed the tensions in the eurozone to the centre of market attention.

Speculators on the CME paired back long euro positions and added significantly to their short positions, raising the value of the net short position in the euro by $5.7 billion to $23.4 billion, as EURUSD finally broke out of its recent tight trading range, dropping down through $1.30.

Source: CFTC, Data Insight, Scotia FX Strategy 

Kit Juckes, global head of FX research at Société Générale, says the potential cost to Greece of leaving the euro would be a “cataclysmic” fall of between 25% to 50% of GDP. He adds that the knock-on effect in terms of confidence around the eurozone cannot be understated.

“The market was already short EURUSD but the bet got a whole load bigger,” says Juckes. “Maybe that explains why the fall over the last week has been so slow, yet the pull-backs are not shaking anyone out.”

He says, tactically, selling into EURUSD rallies is the wisest course of action.

“Strategically, the news is awful, psychological barriers are broken, relative rates are dragging EURUSD lower and a re-test of the year’s low at $1.2620 is the next objective,” he says.

The Australian dollar was also abandoned as worries over a slowdown in the Chinese economy and concerns over its domestic economy saw investors cut long positions and add to short positions in the currency.

The value of the net long position in the Australian dollar dropped by $2.9 billion to $2.5 billion, the lowest for six months.

Michael Derks, chief strategist at FxPro, says judging by the price action since May 8, which has seen AUDUSD drop down through parity, next week’s figures are likely to see another sharp reversal in AUD net long positions.

“Against the backdrop of a harsher landing for the Chinese economy and an equally bumpy ride for the local economy, it is not surprising to see the Aussie bulls raising the white flag,” he says.

“With the bulls in full-scale retreat, and parity reached, it remains to be seen whether this critical psychological level offers any support.”

 Source: CFTC, Data Insight, Scotia FX Strategy 

This article was originally published by EuromoneyFXNews.

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