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  • Both hedge funds and asset managers have recently been scaling back their JPY net-shorts. Meanwhile, hedge funds have started to add GBP net-longs, and asset managers have started to add CAD net-longs.
  • CME Group options data shows continued demand for EUR/USD downside with notable increases in activity for EUR/USD 1.02 and 0.99 put strikes.
  • The FX volatility curve suggests investors are no longer in ‘panic/fear’ mode and, instead, expect calmer conditions ahead.

This new report uses CME Group data to show how investors are positioned in G10 futures and options markets. We also extract insights from FX options markets to determine investor risk sentiment.


Investor positioning

Using CFTC data on investor positioning in CME Group FX futures and options contracts, we break down positioning by investor type. The main changes in recent weeks have been the scaling back of JPY net-shorts, hedge funds adding to GBP net-longs, and asset managers turning net-long on CAD. Here are the details:

Hedge funds:

  • Over the past month, hedge funds have significantly increased their net-long positions in GBP (Chart 1). This has come as GBP has rallied close to 2%. The most actively traded contract currently is the Sep 22.
  • Hedge funds have also scaled back their short positions in JPY with the JPY rallying 4% against the dollar.
  • The other big change was hedge funds turning flat CAD from short.
  • Overall, hedge funds are net-short EUR, net-short JPY, net-long GBP, and net-short AUD.

Asset managers:

  • Asset managers have changed their FX positions less than hedge funds over the past month. However, the biggest change was a reduction in JPY shorts (Chart 2).
  • Elsewhere, asset managers turned net-long CAD (from neutral) and increased their net-shorts in AUD.
  • Overall, asset managers are net-long EUR, net-short JPY, net-short GBP, net-short AUD, and net-long CAD.

Comparing hedge fund and asset manager positioning, we find both agree to be net-long EUR, net-short JPY, and net-short AUD. However, they disagree on GBP (hedge funds are net-long, and asset managers are net-short).

Macro Hive Take: we would disagree with the long euro positions as we think the energy situation in Europe is sufficiently bad to cause significant economic weakness in the quarters ahead. We would agree with short AUD because of China growth weakness.

Option strikes

Using CME Group data, we can determine the most popular strikes in FX options trading. In this report, we focus on EUR/USD options. We find the following:

  • Last week, EUR/USD saw a modest rally back above 1.03. Despite this, there was more activity in EUR/USD downside (puts) than upside (calls). Notably, the open interest in 1.02 and 0.99 put strikes increased compared with calls at the same strikes (Chart 3).
  • Overall, we continue to see the largest net-open interest positions in 1.01 and parity-put strikes. The most popular 1.01 put contract is the Sep 22 (EUUU2).
  • On the upside, the largest net open interest is in 1.05 and 1.06 call strikes.

What to watch: several events could see EUR/USD move to the strike levels mentioned above. The most important event will likely be the Jackson Hole Fed meeting (25-27 Aug). This could indicate how hawkish the Fed remains after recent soft inflation data. A hawkish tone could see EUR/USD fall, while a dovish tone would see it rally.

On the data front, the release of the US and Euro-area PMIs for August (23 Aug) and Euro-area CPI for August (31 Aug) could also be market-moving.

FX investor risk appetite

CME Group has a range of FX volatility data to help investors track the level of volatility. We can also use FX volatility data to determine investor risk appetite.

  • We find the shape of the FX volatility curve useful in this regard. When shorter-dated FX implied volatility is higher than longer-dated volatility, this suggests investors are worried or in panic mode. In contrast, when shorter-dated FX volatility is lower than longer-dated volatility, this suggests investors expect calm.
  • For much of June and July, the FX volatility curve was signaling ‘panic/fear’, but more recently, the curve has moved to signal a return to ‘calm’ (Chart 4).
  • We have also seen this reflected in CME Group’s CVOL volatility indices, where the G5 aggregate FX index has come off a high of 13.4% on 14 Jul to 8.98% on 12 Aug.
  • The coming weeks will be important to see whether the move to ‘calm’ continues.
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