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  • Sell-side analysts expect 2024 USD downside. But only asset managers are positioning for euro strength into 2024. Meanwhile, both asset managers and leveraged funds are positioning for yen weakness.
  • Investors have positions that would benefit from USD/JPY falling as far as 122.
  • The FX volatility curve using CME Group options data suggests investors remain “calm,” though much of the flatness has reversed in the past few weeks.

2023 is nearing its end, and it has been a strong year for currency investing, with strategies such as FX carry gaining over 20% into December. That has occurred as most central banks have conducted the sharpest tightening cycles on record with inflationary trends proving tougher to budge and economies tougher to solve than first thought. Now, with 2024 outlooks released, investors are positioning for the incoming year’s themes. Central bank cutting cycles are expected to take centre stage. That is in part due to the expectation of widespread recessions. However, the risk of dormant inflationary issues reappearing remains.

Sell-side analysts expect the dollar to weaken in this environment (Chart 1). AUD (+6.0%) and JPY (+5.9%) are forecasted to rally the most. Meanwhile, CAD (+1.7%) is forecasted to lag its peers.

However, investors appear unconvinced. CME Group positioning data shows that investors are only net bullish one currency: EUR (versus USD). And, even here, there is not widespread agreement with this bullishness driven by outsized asset manager net longs, which more than offset leveraged funds net shorts. Otherwise, the only other bullishness can be found in leveraged fund GBP net longs. 

We reach similar conclusions studying changes to positioning over the past month. EUR net positioning saw the only outright bullish change as asset managers added to net longs while leveraged funds closed net shorts. CAD positioning saw marginally less bearish positioning. Meanwhile, changes to leveraged fund and asset manager net positioning offset each other in GBP, CHF and NZD. They were outright bearish in JPY and NZD.

So, as we approach 2024, asset managers like to be long EUR, and short all other currencies, AUD and CAD the most, while leveraged funds like to be long GBP, and short all other currencies, JPY and CAD the most. Both are positioned for JPY weakness. 

Macro Hive take: We are unconvinced that the Federal Reserve will cut in 2024, while we think cuts across most G10 central banks are near guaranteed. As a result, the dollar is unlikely to depreciate by as much as expected, which is similar to what investors appear to be positioning for, except for EUR. Furthermore, and focusing on JPY, given weak private domestic demand, already peaked inflation, and wage growth only normalising, it will be hard to envision JPY finding room to rally against the dollar. Instead, USD/JPY is likely to inch higher, which investors are also positioning for.

Option strikes

Investors that express trades in FX options align closer with sell-side analysts than us and the market. According to CME Group data on option strikes:

  • There is notable net demand for USD/JPY puts from 145 and as far south as 122. The main concentration of put demand is found 139.
  • Demand for USD/JPY calls is weaker but more bunched. Over 90% are concentrated between 146 and 154, just an eight-figure range.

What to watch: A return to normality for the yen requires either dollar downside or BoJ monetary policy tightening. Given the recent less dovish commentary from BoJ board members, we will watch the 19 December BoJ meeting for hints of future normalisation.

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 reversed over half a years’ worth of flattening (Chart 5). This suggests that while investors remain net-calm, they are becoming less comfortable in their conviction into year end.
  • 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.

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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