- Leveraged funds and asset managers have bullishly revised euro net positioning. No other currency has seen such decisive repositioning over the period.
- We think the bullish repositioning is unlikely to persist, with the euro set to struggle against upcoming resistance. CME Group data on option strikes suggests bearishness remains, too.
- The FX volatility curve using CME Group options data suggests investors are still in “calm” mode.
The euro has had a volatile year. Having recovered from below parity with the dollar in 2022, it has traded as high as 1.1276 this year and as low as 1.0448*. As such, the recent +4.6% two-month EUR/USD rally is far from abnormal. The recent good run stems from tightening yield spreads as markets price looser monetary policy for the Federal Reserve in 2024 and from buoyant risk appetite. That is, resilient growth and further disinflation, alongside previously extreme USD positioning, have boosted the euro again.
Market participants are buying into the rally, too. Leveraged funds have more than halved euro net-shorts in the past month, driven by a sharp closure in short positions (-8.7k; Chart 1). We find a similar story with asset managers, who have added to already extreme euro net longs after a strong closure of short positions (-23.3k; Chart 2).
No other currency has seen such a bullish, or decisive, repositioning over the same period. While leveraged funds pared Australian dollar net shorts quicker than for the euro, asset managers added to net shorts. A similar rhetoric can be found for the yen, pound, Swiss franc, and New Zealand dollar, too.
*EUR/USD daily high/low spot data from the primary EBS Market CLOB
Macro Hive take: We are approaching the top of a lasting euro range. We would need an unrealistic continuation of current themes for it to break higher. Instead, we think the Federal Reserve will not cut through 2024 due to slower-than-expected monetary policy passthrough and extremely loose fiscal policy. This means demand could remain stronger than expected, keeping prices elevated. The result would be the same resilient growth, but stickier core inflation, which would bring back a bid for the U.S. dollar.
Option strikes
Investor option behaviour remains bearish on the euro. According to CME Group data on option strikes:
- There is notable, consistent net demand for EUR/USD puts from 1.09 down to 1.03. The block of EUR/USD calls at 1.07 is the only exception – most mature on 8 December 2023.
- Demand for EUR/USD puts is weaker and less persistent, mostly concentrated from 1.10 to 1.14.
- Bearish demand remains, with bullish demand comparatively contained. Heavy demand for puts is visible as low as 1.03, near seven big figures below where we currently trade.
What to watch: a reignition of euro downside relies on a dollar turnaround. The next inflation release (12 December) will be key. It could rule out the current market theme: inflation is no longer a problem.
FX investor risk appetite
CME Group has a range of FX volatility datato 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 has paused its months of flattening at around 2021 levels (Chart 4). This suggests investors are calmer and comfortable with the idea that a soft landing is possible.
- The move aligns with CME Group CVOL volatility indices, which have followed a similar dynamic, trading near year lows.
- Outside FX, equity volatility remains historically low, while rates volatility has crept lower but remains historically high
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