FX Positioning: EUR and JPY longs trimmed again

CFTC data displays some changes in G10 positioning in the week 24 February – 02 March. The euro and Japanese yen saw recent long-trimming continue, and given their large weight in USD positioning, aggregate net-short positions on the greenback (versus reported G10 currencies) retracted slightly below 16% of open interest.

Still, positioning in sterling and commodity currencies jumped, and with the Australian dollar moving back into net-long territory, all G10 currencies held speculative net long positioning versus the USD.

EUR/USD positioning retracted for the fourth consecutive week to +18% of open interest, in line with general weakness in the pair. The positioning level has now moved back into the 1-standard deviation range (calculated over the past five years), which suggests that current levels may no longer be considered extremely overstretched compared to historic standards.

What appears clear is that the EUR is suffering from its net-long positioning, which is exaggerating the pressure from the generalised strong dollar momentum. G10 FX dynamics over the past week likely indicate that some more long-squeezing on the EUR should emerge in next week’s CFTC figures.

The yen saw the biggest positioning drop in G10 during the week ending 2 March, with long-trimming worth 5.4% of open interest. The process of unwinding JPY longs extended in line with further weakness in US and global bonds. The yen has been the worst performing currency in 2021 and its previously overstretched long positioning likely played a role in exacerbating the downside. The yen’s positioning is only mildly into positive territory (+10%), and well into its recent standard-deviation band. But the general poor momentum for low-yielders combined with a still-fragile bond market and lingering dollar momentum may push the yen’s net positioning into neutral (possibly even negative) territory.

We expect a similar kind of long-squeeze to be evident in the Swiss franc's positioning, too. As highlighted in previous reports, the CHF positioning gauge appears to be too volatile (and completely detached from market moves) to consider weekly positioning changes as an accurate indication of shifts in market sentiment on the franc.

Sterling positioning has continued to move deeper into net-long territory despite seeing momentum ease in the spot market. GBP’s positioning (+21% of open interest) is now above that of the euro's for the first time since March 2020, and is close to the 24% highs seen in April 2018.

With the fast vaccination process in the UK offering continued support to GBP and no more Brexit uncertainty to discount, we should see GBP positioning set new highs in the coming months.

Commodity currencies all saw rising bullish bets. The New Zealand dollar is still the most oversold currency in the G10 with net-longs amounting to 34% of open interest. The Aussie dollar has moved back into net-long territory, but its positioning remains neutral, according to CFTC data. However, we suspect that the real market positioning on the currency is closer to that of the NZD, and that the CFTC figures are underestimating it. This should also be true for the likes of the Canadian dollar, which has also benefited from rising oil prices.