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Foreign Exchange

Short EUR and CHF the consensus trades in 2012

Positioning data indicate that investors are still looking for further losses in the EUR, regardless of the recent rally in the single currency.

Short EUR and CHF have become clear consensus trades in 2012, Citi’s positioning indicators suggest. The analysis is based on establishing correlations between FX investor returns and currency movements, to infer currency positioning.

Citi tracks three indices of investor returns: BTOP, a measure of commodity trading adviser FX returns, the Parker investable index and the CitiFX PAIN index, which has a larger medium-term investor component for macro hedge funds.

 Correlations between FX investor returns and currency moves in 2012
 Source: Citi

“Using only data from this year has shown investor returns have been highly correlated, with movements in the euro and the Swiss franc, suggesting that investors are short either EUR or CHF or both,” says Steven Englander, head of G10 strategy at Citi.

While it is not possible to say in which currency the market is most short, since both currencies have moved closely together, the analysis does strongly imply that the market is short a combination of the two.

Though hopes of a Greek debt deal that helped the euro rally last week may have squeezed some of these shorts, UBS internal flow metrics show their hedge fund clients were aggressive net sellers of EURUSD on rallies for the second week in a row.

This suggests that although short-term price action in EURUSD is still highly headline driven, speculative investors have not abandoned their bearish euro stance.

Looking at the Swiss franc, USDCHF inflows at UBS were particularly strong from asset managers, and private clients also registered their strongest week in more than six months.

UBS note, however, that interest in EURCHF has now become far more tentative, with most investors now preferring to play a range trading strategy in low volume. Though EURCHF was sold on the week by asset managers, hedge funds helped offset the flow in what might also be short-covering, abandoning earlier attempts to test the floor.

Morgan Stanley’s positioning tracker, which tracks FX positioning based on six indicators, also shows EUR positioning to be at extreme short levels despite last week’s apparent short-squeeze as EURUSD approached $1.30.

Morgan Stanley says this is the first time since October 3 that EUR reached such short levels. One-month rolling betas of currency managers’ and macro hedge funds clients’ returns on EUR movements support Citi’s findings that this section of the market maintains a bearish view on Europe.

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