Investors ceased to cover EUR shorts and started to add USD longs again in the week to 26 May, thus ending the move seen from late April to early May when speculators appeared to shred the short EUR/USD trade that has been a consensus trade since New Year. While this may suggest that markets are ready to bet on a Fed hike later this year, we still need clearer confirmation of a US growth rebound before we see this happening on a wider scale. This week contains a series of events that could set the direction for EUR/USD - today's ISM survey could be instrumental in this respect.
Still, the most striking move in this week's positioning data was the large amount of JPY shorts added. Notably in FX Strategy: G3 - it's all about relative rates we stress that USD/JPY is exposed to a short-term correction following the recent move higher. That said, over the coming 3-6M, our models suggest that relative rates ahead of a first Fed hike in September will imply broad-based USD strength and we see USD/JPY at 125 in 3M.
Overall, non-commercial positioning shows the market is stretched short on EUR and MXN, while stretched on longs in CHF and USD. This highlights that it will require a firm turn in US data surprises for US dollar crosses to enter a sustained rally. Also, following the marked deterioration in Swiss data recently at a time of Swiss franc strength, there is as limit as to how much EUR/CHF can edge lower from here, even if we project a return of euro weakness on a 3M horizon.
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