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Foreign Exchange

Speculators trim record bets against EUR; USD longs cut back sharply

Investors on the Chicago Mercantile Exchange have finally cut their short positions in the EUR after pushing their bets against the single currency to record levels for five consecutive weeks.

Positioning data from the CFTC showed speculators lowered the net value of their bets against the EUR by $2.2 billion in the week to January 31 to $25.7 billion. That was a drop from a record $27.9 billion in the previous week and entirely down to short covering, as investors’ gross long positions in the EUR remained unchanged.

The figures represented the first signs that investors were forced to reverse bearish bets in the EUR in the face of the resilience displayed by the single currency in January.

 Short euro positions retreat from record levels

 
 Source: CFTC

Still, despite the squeeze in short positioning, investors remained overwhelmingly bearish on the EUR, with short positions outnumbering long positions by six to one.

Meanwhile, investors cut their long positions in the USD substantially, with the first snapshot of positioning since the Federal Reserve’s January 25 meeting showing bets on further dollar gains fell by 40%.

The Fed surprised investors with its dovish stance at its January meeting, indicating it would extend the period of exceptionally low US interest rates to 2014.

Investors on the CME sold the USD against all currencies in the week to January 31 except the CAD. They sold a net $6.6 billion over the week, taking the net long position to $12.19 billion – its lowest since November.

“The Fed’s latest policy decision has caused investors to doubt whether the dollar’s recent strength can continue,” says Gareth Berry, strategist at UBS.

 Net long (short) positions on the CME

 
 Source: CFTC

Elsewhere, sentiment towards commodity-linked currencies diverged to a five-year peak of $10.2 billion.

Speculators continued to bet against the CAD, with the value of net short positions falling to $1.9 billion, while extending the value of their net long positions in the AUD to $8.3 billion.

Camilla Sutton, chief currency strategist at Scotiabank, said the divergence between the two positions suggests the carry trade was increasingly a market darling.

“Unlimited central bank liquidity, low volatility and lots of choices for funding currencies leaves an ideal environment for the trade,” she says.

“AUD’s high yield and favourable fundamentals leaves it as the natural long side. CAD on the other hand is largely ignored by carry traders.”

JPY overtook the AUD as the currency in which speculators held the largest net long position, with the value of bets on further gains in the Japanese currency standing at $9.3 billion.

The $2.1 billion net gain was largely driven by additions to gross long positions in the JPY, suggesting speculators were unconcerned over the threat of action from Tokyo to weaken its currency.

“The move is likely the result of investors’ ongoing reaction to Fed-induced USD weakness, and suggests that traders are unfazed by interventionist threats,” says Sutton.

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