FX positioning: Mirroring the tumultuous election day

The Commodity Futures Trading Commission collected the commitments of traders up until 3 November – election day in the US – in their latest positioning report.

Accordingly, what we see in the table below is mostly a mirror of the initial risk-averse reaction to the first results that jaded the blue-wave expectations.

In FX, this global risk dynamic corresponded with a jump in the USD and JPY, the two safe-havens for election-related downside risk for markets.

The USD saw another short-squeezing effect, with the EUR positioning (which accounts for the majority of the USD aggregated positioning) dropping by 2% of open interest in the week ending 3 November.

The JPY, which shows a pronounced inverse correlation with the US-yield curve (which initially flattened on election day) saw its positioning gauge rebound fiercely (+5% of open interest) after having suffered many consecutive weeks of long-trimming due to the markets upbeat expectations around the election.

It is likely that the reported positions embedded into CFTC data were surveyed around the peak of the knee-jerk market reaction in the evening of the election day when first projections started to come in. Accordingly, the numbers above are not very indicative of the current situation in FX positioning, as the eventual win by Joe Biden and the sizeable rally in risk assets (and activity currencies) probably prompted complete unwinding of the above dynamics.

We had long stressed how AUD along with NOK (whose positions are not reported by the CFTC) will be the most sensitive currencies to the swings in US election-related sentiment. And the CFTC reports clearly confirms this: AUD positioning plummeted by almost 8% of open interest, with short positions marginally outweighing long positions for the first time since early September.

The Reserve Bank of Australia's rate cut and expansion of QE also played a role, but we think the election impact was larger, considering that the easing move by the central bank was fully priced in and had limited AUD impact.

As the (market-friendly) victory of Joe Biden started to become the most likely outcome, AUD enjoyed a big rally and, considering the starting point was a neutral position, we are not surprised it outperformed its closest peer NZD, which continues to show an ultra-long position.

Looking at the rest of the G10 space, GBP net-shorts expanded in line with the USD short-squeeze, but we also saw a full inversion of this dynamic in the week after the election.

GBP is entering another pivotal week of Brexit negotiations (there is an informal 15 November deadline for EU-UK trade deal) with a broadly balanced position, but not comparable to the periods were a no-deal outcome was considered a tangible risk.

GBP positions suggest markets are trusting a deal will eventually be forthcoming and we are inclined to think the same. But if negotiations collapse, GBP is likely to face an asymmetric negative reaction.