FX Positioning: GBP shorts remain elevated

CFTC data referring to the period 9-16 October surprisingly shows a flattish development in GBP/USD net speculative positioning. This is despite a significant sterling rally in the same period (approximately +4% vs USD), triggered by hopes of a new Brexit deal. We might need to wait for next week’s data to witness some “short-squeezing” effect, but for now, a still extensive short market positioning (-30% of open interest) on GBP tends to suggest more upside room for the currency.

Nonetheless, caution on the pound is still much warranted, given that – as noted by our economics team – the hurdles to have a deal approved (and ratified) by the UK parliament remain firmly in place.

The last ten days have been characterised by a rebound in global risk sentiment, mainly thanks to optimism about Brexit and the US-China trade dispute as well as rising expectations about a Fed rate cut in October. This dynamic appeared evident in the yen net speculative positioning, that dropped into negative territory (-4% of open interest) for the first time since last July.

Another safe-haven asset, the Swiss franc, saw some speculative shorts being added. In line with the recent trend, CAD is the main activity currency benefitting from higher risk sentiment (net positioning 5% higher to +9% of open interest), while no improvements were registered for the highly offered AUD (-29%) and NZD (-54%, the biggest G10 short). As highlighted in our previous FX positioning update, the more supportive trade outlook for CAD helps explain this dynamic.

Similar to the case of the sterling, speculative positions on the common currency remained flat at -15% (of open interest) despite EUR/USD being broadly supported throughout the same period. We suspect this mirrors the market’s reluctance to enter EUR longs given a medium-term outlook that remains gloomy for eurozone sentiment.

In particular, latest data-flows (CPI, Industrial production, ZEW) still failed to signal any relief in the battered euro-area economy and we struggle to see ECB efforts on the monetary side to be sufficient to trigger a change of direction. When adding the non-negligible risk of more US tariffs on eurozone exports, the low market appetite for the euro seems even more warranted. In line with this view, we expect EUR/USD to head back below 1.10 by the end of the year.