Last week we discussed in detail the shifts in regimes and positioning in the FX markets - most notably relative to the EUR. CitiFX is out with a note today that extends our concern as their proprietary CitiFX Positioning Indicator shows a rise from a record short in EUR in mid-July to a record long by last week. The EUR buying has been broad based and not just concentrated against the USD, with investors covering short exposure on pairs such as EURAUD and EURCAD. The shift in positioning came as peripheral spreads tightened and US yields fell, implying that it was kick-started by the surge in expectations for Fed and ECB easing. With equity markets roughly steady in recent days and data flow still relatively weak, this leaves the impression that the continued shift in FX positioning has been more about momentum than improvement in sentiment. This suggests that FX markets may be pricing in a higher degree of confidence on easing (or signs thereof) at the Jackson Hole conference and later ECB meeting. Given that absolute positioning for EUR is now long, this sets a high bar for policymakers to exceed and suggests risks are skewed in favor of a reversal on disappointment with Chairman Bernanke and President Draghi.
CitiFX Positioning Indicator