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Foreign Exchange

Currencies: Short & caught?

Last weekend’s G7 meeting has apparently been followed by widespread euro/dollar selling.

Furthermore, this is not the liquidation of longs, but the initiation of short positions. Tellingly, the euro has not weakened.

A nice piece of research from ABN Amro’s Greg Anderson points out that in February – which may or may not be relevant given that we’re now in April – there was a surge in foreign private investment in US fixed-income securities. A total of $77 billion-worth of paper was bought. However, the demand from foreign official institutions, such as central banks, was at its lowest for six months.

“The combination of TIC and central bank data suggests that Bric central banks bought tens of billions of EUR and/or gold in February. Private investment flows to the USD are unlikely to be as high as they were in February on a consistent basis, so if central banks have turned against the USD as well, the outlook for the USD remains bearish,” Anderson writes. The TIC report shows the aggregate data of purchases and sales of US securities by foreigners.

“If central banks continue to shun the USD for the rest of the year, it will likely continue to fall, because private inflows are not likely to be enough to cover the trade deficit,” he adds.

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