A good deal of the massive USD longs taken on in the week to 28 May were unwound last week following the weak ISM manufacturing report out of the US.
Speculators instead looked to the EUR, which saw short covering after decent country manufacturing PMIs. JPY shorts were also shed, as investors questioned the Bank of Japan’s commitment to its aggressive monetary easing following recent turbulence in financial markets. What remains is a market that continues to look stretched on non-commercial shorts in most major currencies except the USD. Notably, the cut-off point for this week’s data was before the ECB meeting: while more EUR shorts were probably taken off after the ECB adopted a more hawkish stance at Thursday’s meeting, from a positioning point of view the single currency should have the potential to keep it up in the near term.
Commodity currencies continue to be sold off by speculators. Prices of energy and metals have continued to trade sideways as Chinese data failed to improve. However it has not deteriorated enough to trigger expectations of new stimuli. Even a long-standing speculators’ favourite – the kiwi – has lost speculative appeal recently as the threat of RBNZ intervention looms. We are closing down our near-term long bet on AUD/USD: while positioning continues to suggest room for a rebound, the longer-term story of USD strength as the Fed starts tapering QE and a currency overvalued (on PPP) could continue to dominate.
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