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  • Hedge funds are scaling back their bearish EUR/USD positions, while asset managers have increased their EUR/USD longs 
  • CME Group options data reveals significant interest in EUR/USD calls around the 1.00 and 1.03 levels
  • The FX volatility curve has flattened but remains in ‘fear’ territory 

Investor Positioning

The Fed’s 75bp hike and speculation over China ending its zero-COVID-19 policy have been grabbing headlines in recent weeks. CFTC data on investor positioning in CME Group FX futures and options contracts can provide unique insights into investor behaviour during this period. We find that despite Fed policy rates being at 4%, investors have been scaling back their bullish dollar positions. Notably, hedge funds have more than halved their euro shorts (Chart 1). Meanwhile, asset managers have increased their net EUR longs. Here are the details of this and other positioning:

Hedge funds:

  • Over the past month, hedge funds have heavily scaled back their EUR net-shorts, cut back their net-long GBP positions, and flipped to net-long in NZD (Chart 1)
  • They have also increased their net-short AUD and CHF positions
  • They remain short JPY and CAD
  • Therefore, hedge funds appear to prefer expressing bullish dollar views against JPY, AUD, and CAD and less so against EUR and NZD

Asset managers:

  • Asset managers were already net-long EUR but have increased the positions over the past month, it is their largest net-long since March 2022
  • Asset managers have increased their net-shorts in JPY, CHF, AUD, and NZD
  • They have reduced their net-shorts in GBP

Comparing hedge fund and asset manager positioning, we find both are net-short JPY, CHF, and AUD. They disagree on EUR, though hedge funds appear to be converging to the bullish view of asset managers as hedge funds are reducing their net-shorts.

Macro Hive take: We have been bearish on the euro given a hawkish Fed, energy shortages in Europe and China weakness. But the euro has recently held up well – partly on improving global risk appetite. We still like to be bearish on the euro, so for now we would side with hedge funds.  

Option Strikes

With the euro testing parity, there is renewed focus on the currency. We can use CME Group data to determine the most popular strikes in FX options trading and assess the levels on which investors are most focused. We find the following:

  • There is large (net) open interest in option strikes at around 1.000 and 1.030 – all with more demand for EUR calls than puts (Chart 3)
  • On the bearish side, no one strike stands out as open interest is fairly evenly distributed below parity

What to watch: If China were to re-open, that would be bullish EUR/USD. Aside from that, we need to monitor European weather and energy usage – so far, a mild winter has seen less strain in natural gas markets, which has helped EUR/USD. The next ECB meeting is on 15 December – markets are torn between pricing a 50bp or a 75bp hike. The initial Euro-area CPI print for November is due on 30 November – this could prove to be the decisive data point for the ECB to settle for a 50bp or 75bp hike. 

FX Investor Risk Appetite

The 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, the FX volatility curve has gone sideways in ‘fear’ territory but remains far below its peak (Chart 4). This suggests markets still retain some nervousness
  • CME Group’s CVOL volatility indices suggest an improving risk picture. CME Group G5 aggregate FX has fallen from 15% at the end of September to less than 12% over the past week 
  • Both equity and rates volatility have also started to fall
  • Markets appear to be calming again, though our FX volatility curve measure suggests investors should not be complacent 
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The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.


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