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  • FX markets have taken center-stage in recent weeks and CFTC positioning data on CME Group contracts provides unique insights on these moves.
  • Notably, we find that hedge funds were still net-long GBP into the UK mini-budget, which saw GBP tumble. Both hedge funds and asset managers are also net-short JPY, but are mixed on EUR.
  • CME Group options data shows demand for GBP/USD downside. There has been notable activity for GBP/USD 1.05, 1.07 and 1.10 put strikes.
  • The FX volatility curve indicates investors are firmly in ‘panic/fear’ mode. This suggests continued uncertainty in the weeks ahead.

Investor positioning

FX markets have dominated headlines in recent weeks and CFTC data on investor positioning in CME FX futures and options contracts can provide unique insights on the moves. Notably, we find that hedge funds were still net-long GBP into the UK’s mini-budget announcement (September 23). These positions were likely sold as the pound plunged on the day. Meanwhile, asset managers were net-short GBP and so likely benefited from the move. Here are the details:

Hedge funds:

  • Over the past month, hedge funds reduced their net-long GBP positions, but they remained long ahead of the UK mini-budget (Chart 1).
  • Hedge funds increased their JPY net-shorts but maintained their EUR net-shorts.
  • Elsewhere, hedge funds increased their NZD net-shorts and flipped their CAD net-longs to net-shorts.

Asset managers:

  • Asset managers remained stubbornly net-short GBP, increased their net-long EUR positions and stayed net-short JPY (Chart 2).
  • They also reduced their net-long CAD positions.

Comparing hedge fund and asset manager positioning, we find both are net-short JPY, net-short CHF, net-short AUD, and net-short NZD. 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 would be cautious extrapolating GBP weakness given the pace of its declines. Instead, we think EUR could still have ongoing negative drags whether it is a worsening fiscal picture, heightened geo-political tensions or weak growth. On JPY, the return of intervention by the BoJ/MoF makes us hesitant to be short JPY. 

Option strikes

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

  • There is large open interest with option strikes at 1.05, 1.07 and 1.10 – all with more demand for GBP puts than calls (Chart 3).
  • On the bullish side, we find net-demand for GBP calls at 1.035 and 1.045 – this suggests investors see these levels as attractive to see GBP/USD base.

What to watch: clearly the biggest focus for the UK remains its fiscal picture. The government has suggested that they will announce measures to reduce the deficit in the coming weeks. This could be market moving. The other focus will be the Bank of England meeting on 3 November. Currently, markets are pricing an almost 150bps hike for that meeting. Any disappointment could see GBP weaken further. In terms of data, the key release will be UK inflation data on 19 October.

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 markets. The latest data finds:

  • In recent weeks, shorter-dated volatility has surged compared to longer-dated volatility. This has seen the FX volatility curve move deep into ‘fear’ territory (Chart 4). Other markets, such as equities and credit, are also showing signs of panic.
  • The CME Group’s CVOL volatility indices confirms this development. The CME G5 aggregate FX has jumped to over 15% - the highest level since the outbreak of COVID in early 2020.
  • These trends suggest continued uncertainty in the weeks ahead. 
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