Investors Added to Record Short EUR Positions

The latest IMM data cover the week from 3-10 January.

Extreme euro positioning: Investors added to already record EUR shorts, which have now reached 53 percent of open interest. Extreme positioning usually implies a heightened risk of a spot correction, but we see only limited potential for a bigger EUR rebound in the short term. First of all, the IMM data may exaggerate overall market positioning, as EUR/USD option market skews have narrowed further and now trade near neutral levels.

Secondly, eurozone event risks remain significant with the Greek PSI and potential action by the other rating agencies as key near-term risk factors. That said, investors are likely to be very short the euro – even if less so than indicated in the IMM data – and short positions therefore do not appear attractive in our view. We prefer to stay neutral for now.   

Modest increase in long USD positions: Investors added USD1.4bn to aggregate net long dollar positions – but with investors still long AUD, JPY and NZD, long dollar positions are not nearly as stretched as short euro positions. One of the most interesting questions for Q1 is whether the dollar can continue to trade in tandem with risk assets. So far the DXY dollar index has gained 1.6% this year and as long as support to risk assets mainly comes from improved US macro data, the dollar appreciation trend has the potential to run further. Beyond the short term we are sceptical about this decoupling story, however, and continue to expect dollar weakness during risk-on periods. The main argument being the dollar-negative flows stemming from the US current account deficit.