FX Positioning: Betting on a broad USD bear story

Net speculative shorts on the dollar (aggregate contracts against G9 excluding SEK and NOK, which are not reported) rose to 9% of open interest in the week ending 14 July, touching again the peak seen in June. The high resilience of equities to geopolitical tensions with Hong Kong and China at the centre and to record jumps in Covid-19 cases and deaths in some US hotspots appear to be adding fuel to the dollar-bear sentiment among speculative investors.

Positioning on the DXY – at -21% of open interest - is also pointing at a prevalently bearish stance on the dollar, although the gauge has edged higher in recent weeks after a drop to -27%. Still, we do not deem positioning on the DXY as highly reliable due to its relatively low open interest and high volatility.

What is surely interesting to note is how speculators are net long all G10 currencies vs the USD with the only exception of GBP and CAD. It is the first time since March 2018 that five of the seven reported currencies are in net-long territory vs USD. The fact that currencies with diverging sensitivity to risk sentiment are seeing positioning rising at the same time can be a signal that investors are starting to look at a cleaner and broader USD bear story.

The EUR remains the key contributor to the depressed dollar positioning, as net positions on the common currency edged higher to 18% of open interest (the highest in G10) in the week 8-14 July. Investors had likely started to position for the ECB meeting and – above all – the EU summit, which is still ongoing.

CHF net positioning showed another wide move, rising to 15% of open interest. This confirms recent evidence that CHF positioning is becoming increasingly volatile.

Accordingly, we are reluctant to see the latest jump as significative of any sharp increase in CHF bullish sentiment. There is a possibility that some investors entered long-CHF positions ahead of the EU summit to hedge against a possible stall in the negotiations. Still, no signs of correction in the EUR positioning suggests the opposite.

The antipodeans saw their net positioning rise to positive values in the week under analysis, in line with supported risk sentiment and the weaker-USD environment. Incidentally, the rally in Chinese equities may well have contributed to a rise in long positioning on AUD and NZD as proxy trades (given their high correlation with CNY).

Lockdown measures in Australia continue to leave few marks on AUD and its positioning gauge. Such complacency of AUD makes us believe the currency is still facing more downside risks than its closest peers and expect some downside trend to materialize in AUD/NZD in the coming days.

Meanwhile, CAD’s positioning remains stuck into deep negative territory. The divergence with the dollar bloc is likely related to a higher uncertainty around the economic recovery in Canada, also due to the high exposure to lockdown measures in the US. Still, the lingering net-short positions offer a reason for seeing the downside for CAD as relatively limited in the short term – barring major corrections in risk sentiment.

The one-off push to GBP from the UK Chancellor’s announcement of the fiscal plans does not appear particularly evident in the positioning data. GBP net positioning has improved again, but this is largely in line with the weaker dollar environment shown in the week.

There is little doubt that investors remain quite aware of the downside risks to sterling as uncertainty around the UK-EU trade negotiations lingers. Still, it is worth noting that a positioning gauge at -8% of open interest is only mildly negative compared to the levels seen when markets were pricing in a hard Brexit last year (positioning was hovering around -30%) even compared to the -19% seen in June.

This evidence tends to endorse our view that there is sizeable room for more stress to be built into sterling in the coming weeks and months as EU-UK negotiations enter a crucial phase – but we remain positive a trade deal will eventually be agreed on.