CME Group FX Position Watch: Will Dollar Strength Continue?
- Leveraged funds have increased short positioning in the euro (EUR) over the past month, with EUR net shorts exceeding shorts in all other currencies except JPY. Asset managers have trimmed bullish EUR positioning, although these exposures still far exceed all others.
- EUR/USD has traded between ~1.06 and ~1.10 year-to-date (YTD), currently sitting near the bottom of this range. CME Group data on option strikes suggests markets are broadly balanced between upside and downside
- The FX volatility curve using options data suggests investors remain calm, although this sentiment was slightly calmer earlier this year.
EUR/USD trended lower through January to mid-February, from ~1.1000 to ~1.0700, before rallying into early March. The pair then drifted lower into April, spiked higher for a week or so, then drifted down to now trade near its YTD trough around 1.0600. Interest rate differentials and stronger U.S. economic data drove the dollar strength versus the euro. Also contributing were more hawkish monetary policy expectations for the U.S. Federal Reserve (Fed), especially relative to expectations for the European Central Bank (ECB).
Leveraged funds have increased short EUR exposure. They are net short of 55.9K contracts versus a short position of 32.9K contracts a month ago (Chart 1). Additionally, JPY shorts have remained a standout and CAD shorts have more than doubled in recent weeks.
Meanwhile, asset managers have trimmed bullish EUR exposure from +296.2K contracts to +270.1K contracts (Chart 2). Asset managers have ramped up short GBP positioning by ~50% and increased shorts in JPY, AUD and CAD.
Macro Hive Take: We think EUR/USD’s tight YTD range is more vulnerable to the downside. Recent strength in U.S. data and the attendant rise in U.S. yields has driven selling pressure in the pair, and we think U.S. yields, especially in deferred maturities beyond five years, could keep climbing. This will weigh on EUR/USD.
Option strikes
Investors see EUR/USD upside and downside as symmetric and broadly indicative of the 2024 YTD range-trading. According to CME Group data on option strikes:
- There is net demand for GBP/USD calls from 1.08 to 1.14, with the biggest cluster of demand between 1.09 and 1.11 (Chart 3).
- In contrast, there are bigger clusters for downside demand between 1.08 and 1.05, with the biggest net open interest reading at 1.08. This means upside and downside sentiment are roughly in balance.
What to Watch: We will monitor ECI (April 30), the FOMC rate decision (May 1) and the U.S. jobs report (May 3). Eurozone CPI (April 30), Retail Sales (May 7) and GDP (May 15) will also be on our radar.
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:
- After a brief recent spike back into last year’s range, the FX volatility curve steepened in recent weeks (Chart 4). This suggests investors remain calm, likely because economic growth has stabilized and conviction remains that easier central bank policy is coming this year.
- The move aligns with CME Group’s CVOL volatility indices, which have followed a similar dynamic to trade near year low
- Outside FX, equity volatility remains historically low (albeit slightly higher in recent weeks), while rates volatility remains historically high.
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