IMM data released last Friday revealed that investors for the third consecutive week reduced their aggregate USD exposure. The report showed that in the week to 16 December speculators reduced their net USD positions worth a total amount of USD 7.4bn - the largest single week USD exposure reduction in nine months. The move has sent aggregate speculative USD positioning to the 98th percentile, which is the least bullish level since September 2014. This week's change was in particular driven by short-covering in CHF, JPY, EUR, GBP and AUD. The reduced appetite for USD reflects profit taking and risk reduction ahead of year-end.
The unwinding of USD positions was an explanatory factor for the considerable USD strengthening post Wednesday's FOMC meeting with the DXY index reaching a new record high on Friday. While we still think USD fundamentally looks attractive - even after the recent appreciation - we emphasise that the USD is highly vulnerable to temporary corrections lower before year-end. This is the case as speculative long USD accounts remain stretched, thereby exposing the greenback to profit taking when the relief rally in risk assets wanes. We expect the USD to strengthen in H1 15 and target EUR/USD at 1.20 in 6M.
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