April has been a month of stability compared to tumultuous March. The failure of Silicon Valley Bank (SVB) in March and later the acquisition of Credit Suisse by UBS sparked fears of a banking crisis. Bond yields plunged, and stocks fell initially but recovered quickly. In FX, unlike previous episodes of market volatility, the dollar fell. The pound, yen and euro all rallied by over 2% against the dollar over March. FX markets were therefore taking their cues from central bank expectations, with the Fed being repriced lower the most. So far, April has not seen the banking crisis continue, but the dollar has remained the weak side.

On positioning, hedge funds have reduced their net long euro positions since the failure of SVB. They remain net short yen and have reduced their large long pound positions to flat (Chart 1). The biggest swing has been in the Canadian dollar, where hedge funds have gone from long to heavily short. 

Meanwhile, asset managers have maintained their large net long euro position and modestly increased their net long yen position (Chart 2). Contrasting hedge funds, asset managers have scaled back their bearishness on the pound and are now flat from net short. Their other major positions are short Australian dollar and Canadian dollar. 

Together, the CME Group positioning data suggests the highest conviction around euro (bullish) and Canadian dollar (bearish) as both hedge funds and asset managers have the same positions.

Macro Hive take: We think the dollar is in a broad range. It rallied in February and sold off in March and the first half of April. Therefore, our bias is for dollar strength for the balance of April. We expect the large number of Fed cuts priced by markets to be scaled back, supporting the dollar. The most recent solid payrolls data and still high core CPI for March at 5.6% (y/y) suggest a high probability of the Fed hiking at their next meeting on 3 May. 

GBP/USD reached its high for the year in early April at 1.2525. Investors appear to have given up on placing directional bets on the currency, with hedge funds exiting their longs and asset managers their shorts. However, CME Group data on option strikes reveals another perspective on investor bias. We find the following:

• There is notable net demand for GBP/USD calls above 1.25 with notable strikes at 1.2650 (Chart 3). This suggests tactical bullishness for a jump in GBP/USD.
• On the downside, demand for strikes is more mixed, with a combination of net bullish and bearish positions. This suggests less focus on the downside.

What to watch: Outside the broader dollar trend and US data, UK data such as that on the labour market (18 April), inflation (19 April), retail sales (21 April) and PMIs (21 April) will be key market movers for GBP. The market is pricing almost two more hikes by the Bank of England. Any disappointment in the data could see those expectations scaled back and the bullish GBP sentiment reverse. 

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:

• The FX volatility curve was inverted in the first half of March when the US bank crisis started, but it has since returned to flat. This suggests investors are no longer in ‘fear’ mode (Chart 4).
• We also find that CME Group’s CVOL volatility indices followed a similar dynamic, jumping in the first half of March and falling since. This tallies with the optimistic take of the FX volatility curve.
• Outside FX, equity volatility has been falling, while rates volatility remains elevated.
• Overall, this suggests FX markets appear to think the bank crisis is over. 

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