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- Hedge funds have increased their net-long positions in GBP, while asset managers have increased their net-shorts in GBP. Both investor segments, however, agree on JPY, where they are net-short.
- CME Group options data shows demand for GBP/USD downside. There has been notable activity for GBP/USD 1.1450 and 1.130 put strikes.
- The FX volatility curve indicates investors are back in ‘panic/fear’ mode. This suggests the possibility of larger FX moves in the coming weeks.
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.
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 hedge funds increasing their GBP net-longs and adding to EUR net-shorts, and asset managers reducing EUR net-longs and adding to JPY net-shorts and GBP net-shorts. Here are the details:
- Over the past month, hedge funds have dramatically added to their net-long positions in GBP (Chart 1). This has come despite GBP tumbling 6% over August.
- Hedge funds continue to scale back their JPY net-shorts but increase their EUR net-shorts.
- Elsewhere, hedge funds flip from net-short CHF to net-long.
- The biggest changes for asset managers were their reduction in EUR net-longs and increase in JPY net-shorts (Chart 2).
- On GBP, they added to net-shorts.
- 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-short JPY, net-short AUD, net-short NZD, and net-long CAD. But they disagree on EUR and GBP. With EUR, hedge funds are net-short, and asset managers are net-long. With GBP, it is the reverse, with hedge funds net-long GBP and asset managers net-short.
Macro Hive take: we are bearish on both EUR and GBP due to the energy shock facing the region, central bank unwillingness to tame inflation, and, in the case of the UK, uncertainty around the new administration. So, we would agree with hedge fund net-shorts in EUR and asset manager net-shorts in GBP. We are also bearish JPY, which both hedge funds and asset managers also believe with their net-shorts. The Bank of Japan is one of the few central banks that has not hiked rates so far in this cycle.
Using CME Group data, we can determine the most popular strikes in FX options trading. In this report, given the recent UK leadership election, we focus on GBP/USD options. We found the following:
- In general, there has been more demand for GBP puts than calls at every strike level. The exception is options with a strike of 1.15, where there has been more demand for calls than puts. This contrasts with a week earlier when demand for puts at that price level dominated (Chart 3).
- Elsewhere, we find that last week open interest in GBP/USD puts with a 1.1450 strike increased sharply compared to GBP calls with the same strike.
- Overall, we see the largest net-open interest positions at 1.170, 1.165, 1.145, and 1.130 – all with more demand for puts than calls.
What to watch: the biggest event to watch for the UK will be a possible emergency budget by the government of newly appointed Prime Minister Liz Truss. This could see the UK budget balance deteriorate, which may be viewed as bearish GBP. In other events, UK inflation data on 14 September and the Bank of England meeting on 15 September are likely to be market-moving. Markets are pricing a 93% chance of a 75bps hike – anything less could see GBP sell off.
FX investor risk appetite
CME Group has a range of FX volatility data to help investors track the level of volatility. Also, we can 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. The latest data finds:
- In recent weeks, shorter-dated volatility has started to rise faster than longer-dated volatility, so the FX volatility curve is back to signaling ‘panic/fear’ (Chart 4). This shift is confirmed by equity weakness and higher rates volatility.
- The CME Group’s CVOL volatility indices also reflect this development. The G5 aggregate FX COVL Index dipped below 9% on 12 August but has since risen to 11.7%.
- The trends in FX volatility suggest disruptive market moves could occur in coming weeks.
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