Articles
5 July 2021

FX Positioning: Preparing for a summer of carry trades

CFTC data for the week ending 29 June shows how speculators continued to trim their dollar shorts. After a large long squeeze in the EUR the week before, this week was the turn of JPY and CHF. Commodity currencies didn’t see any large increase in shorts, signalling an interest in positioning for carry trades.

Dollar net shorts at their lowest since April

CFTC data on G10 FX positioning show another round of dollar short-squeezing in the week ending 29 June. A part of such dynamics is still likely related to the post-June FOMC adjustments in the FX markets, where a hawkish re-repricing of the Fed’s rate prompted a dollar rally.

The net aggregate dollar positioning versus G10 currencies reported by CFTC (i.e. G9 excluding NOK and SEK) moved from -5.9% to -4.6%, with net shorts reaching their lowest level since April.

Source: CFTC, Macrobond, ING
CFTC, Macrobond, ING

Carry-trade positioning emerging…

In our positioning commentary from last week, we saw how the likes of EUR and GBP appeared to have been the main victims of the dollar’s short-squeezing. We had identified in the resilience among some commodity currencies a possible indication that the FX market was shifting its positioning in a way to maximize carry potential within the G10 space.

The missing parts in that rationale were an increase in shorts in the other low yielders (JPY and CHF), and more evidence of a resilience to USD short-squeezing among commodity currencies. In the latest CFTC positioning report, both those missing parts emerged.

The yen, despite starting from deeply oversold territory, saw a large increase in net shorts (of more than 7% of open interest), with its current positioning being at -36% of o.i. CHF showed an increase in net shorts of a similar size, although we continue to highlight how the CFTC positioning data on the Swiss franc has seen very high volatility in recent years and should therefore be taken with some caution.

… in line with $-bloc resilience

The resilience in commodity currencies, despite a clear tendency to unwind net-short positions on the USD, emerged for a second consecutive week. CAD continues to be the preferred currency of the pool of speculators surveyed by the CFTC, having the largest net-long positioning after CHF (that has a very volatile positioning, as mentioned above) in the G10 space, and was the only currency showing a material increase in net longs in the week ending 29 June. This is likely due to the benign combination of a good economic outlook (which keeps improving as the US one improves) and a hawkish central bank.

The other two commodity currencies reported did not see an increase in net positioning but have seen a very contained decrease (less than 1% of open interest), overall holding out much better than the low-yielding segment in G10 to the post-FOMC dollar rally.

We think all this may be an indication of how markets may be positioning for a quiet summer in terms of volatility, where carry trades may emerge as an attractive strategy. In this sense, we could see the high-yielding currencies (especially those backed by hawkish central banks) outperforming the low-yielding currencies in the coming weeks.

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