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- Open interest jumped for most of G10 FX in 2022, especially GBP, JPY, and EUR.
- Both hedge funds and asset managers have turned more positive on EUR over 2022 but remain bearish JPY as we enter 2023.
- CME Group FX option strike data suggests 1.09 is a key level for EUR/USD.
Interest in FX Futures Increased in 2022
2022 has been the year of USD strength. All G10 currencies weakened against USD. JPY fell the most (c.-16%), while CHF fell the least (c.-2%). Meanwhile, investors actively traded FX markets. Open interest in FX futures increased significantly across most G10 currencies. A year ago, open interest for EUR/USD CME Group futures was 720,000, and today it has grown to almost 850,000 (Chart 1). GBP contracts saw the biggest increase across G10 FX, overtaking JPY open interest during 2022. AUD open interest saw the only decrease. It seems investors were heavily focused on GBP, JPY, and EUR in 2022.
How Investors Traded FX
On positioning, hedge funds started the year net-short G10 FX against USD (Chart 2). They were heavily net-short EUR and net-short the rest of G10. Today, they have significantly scaled back their EUR net-shorts, maintained their JPY net-shorts, turned net-long GBP, and increased their AUD net-shorts.
Asset managers started the year net-long EUR but net-short other currencies against USD (Chart 3). Today, they have increased their EUR net-longs, kept their JPY net-shorts, reduced their GBP net-shorts, and turned closer to net-neutral against most other G10 currencies.
Views Into 2023
Heading into 2023, investors appear to agree JPY will continue to weaken: both hedge funds and asset managers are net-short. That view was correct over 2022; however, with speculation that the Federal Reserve (Fed) is close to the end of its hiking cycle, that view could face challenges in 2023.
Meanwhile, both hedge funds and asset managers appear more optimistic on EUR. Meaningful European Central Bank (ECB) hiking through 2023 could cause hedge funds to cut EUR shorts even further.
Hedge funds appear bullish on GBP for 2023, positioned net-long, but asset managers remain short. Uncertainty surrounding UK inflation will drive GBP.
EUR/USD has grinded higher over the past month. The big question is whether it can convincingly move away from 1.05. CME Group data on option strikes reveals investor bias. We find the following:
- Above 1.055, there is more demand for EUR/USD calls than puts, suggesting investors expect EUR/USD to rally. The largest strike is around 1.09 (Chart 4). This could well be the target for investors in early 2023.
- Below 1.05, there is moderate net-demand for EUR/USD puts over calls. This suggests much weaker conviction around further EUR/USD weakness.
What to watch: outside of U.S. CPI, Fed and ECB meetings in December, investors will focus on the 26 January Fed meeting. If the Fed lowers its hikes to 25bps, USD could weaken as investors speculate the Fed is close to ending its hiking cycle. On the European side, investors will focus on the energy picture as European countries start to stock up for 2023. A renewed focus on poor energy dynamics could see EUR weaken.
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, the FX volatility curve has fallen, but shorter-term volatility remains higher than longer-term volatility. This suggests investors are still in ‘fear’ mode (Chart 5).
- However, CME Group’s CVOL volatility indices continue to fall. CME Group G5 aggregate FX index has fallen to 10.2% from 12.6% at the end of November. This provides a more optimistic view on risk dynamics.
- Outside FX, both equity and rates volatility have started to increase.
- Overall, this suggests that markets are starting to get more nervous as we enter 2023.
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