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.
