FX Positioning: Where have the bulls gone?

CFTC FX positioning data as of 2 June still failed to realign with the recent dynamics in the spot and futures markets. Despite some signs of a short squeeze in the New Zealand dollar, the unchanged and deeply short positioning in the Australian and Canadian dollars - along with net longs in defensive Japanese yen and Swiss franc – still reflects a risk-off environment (figure below).

NZD had long been the most oversold currency in the G10 when global risks took centre stage. The currency sold off at the peak of the US-China trade war last year and during the pandemic-induced market shock this year. Last week’s drop in net shorts (-5% of open interest), however, simply re-aligned NZD positioning with that of its closest peers AUD and CAD, which remain in oversold territory.

What surely surprises the most in the CFTC data is the absence of any sign of short-trimming in AUD, whose net positioning remained around -25% of open interest throughout all of May, despite AUD/USD having risen by 7.5% in the period 2 May - 2 June.

The substantial absence of any similarity between the FX positioning gauges and the actual market moves is not isolated to the commodity FX sphere.

We have more then once highlighted how the aggregated (weighted) positioning of USD vs G10 remained very stable as the dollar spiked and then corrected fiercely during the peak of the pandemic impact on markets. FX positioning data failed to show any sign of the dollar being materially oversold at the end of April, which makes it less surprising that we have not witnessed a risk-positive shift in positioning in May.

The recent decoupling of positioning and spot dynamics suggests that the explanatory power of CFTC positioning data has likely decreased recently. It's hard to imagine that the AUD's recovery lately has not been affected by a substantial short-squeeze, as CFTC data seems to suggest.

It must be noted that CFTC data is based on a survey of only a fraction of the actors – mostly short-term speculative investors - in the FX market. For now, we keep signalling how for certain currencies this data must be taken with a pinch of salt.

As sterling normally moves more independently from the simple global sentiment oscillations, its positioning gauge is still a good informative tool. As we discussed in a previous commentary, GBP positioning has been strictly interconnected with the Brexit saga in the past two years, as a rise in net shorts often corresponded to a higher perceived risk of a hard Brexit (figure below).

The recent resurgence of Brexit-related shorts in sterling has pushed down the positioning gauge to negative levels that were last seen before the December 2019 election.

GBP net positioning is now at -19% of open interest after a significant drop of -7% (of o.i.) in the week 27 May – 2 June. This has been a function of the lingering uncertainty surrounding the UK-EU trade negotiations, with investors seeing GBP downside potential rising as the risk of the UK leaving the EU without a trade deal increased.

We discuss the implications for GBP of the ongoing Brexit negotiations on “Brexit returns as major headache for the pound”. Despite markets having become less complacent about the risk of a no-deal exit, we still see some room for additional stress to be built into sterling.