The EUR record short position paints an ugly picture

The weekly CFTC Speculative Positioning Report for May 7th , and only released on Friday, again shows that the EUR net shorts have reached new lows (-18b EUR’s). The net long dollar positions increased, albeit marginally (+$19.4b). Astonishingly, these numbers do not include the dramatic sell off we have witnessed last week. It very much a one sided trade with EUR bearishness escalating. Interestingly, net short positions in JPY were dramatically cut by 50% with risk aversion. The commodity currencies had only minor changes w/w with CAD long at +4.9b and AUD longs easing to +$4.4b. After Fridays actions these commodity positions were probably scaled back even further. Not surprising however was GBP being the second largest short vs. the dominant USD (-$6.7b). Now that the negative election ‘risk’ has come to pass, sterling seems to have failed to recover. On the bright side, it’s the one currency that analysts agree should perform favorably in the medium term. With shorts at a record why does the G7 not intervene? Do they deem it futile as price action remains orderly or are they waiting for an upward day to lean into it? Those days’s are few and far between.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

Friday was an eye opener again for most market participants. The US data release did very little to influence sentiment directly. Retail sales were up again, but the details were weaker than the headline suggests (+0.4% vs. +0.2%). The core (ex-autos) was revised up by double the initial print in Mar. and posted a gain of +0.4% m/m. in Apr. Digging through the data, all of the growth came from building materials (+6.9%), gas (+0.5%) and autos (+0.5%). If one excluded these items, the headline print would have recorded a decline of -0.2% for retail sales. That being said, analysts believe that we will see a stronger rebound for this month as family’s incomes continue to improve along with the job gains.

US industrial production beat expectations (+0.8% vs. +0.7) and increased for a second consecutive month as business investment is consistently being ramped up. Inventories happened to post the first outright gain in the 1st Q of this year, as demand improved around the world. By default, this automatically gave production a lift. Even more pleasing was the breath of the production increase, it was relatively widespread across the US, which suggests that the recovery is broad based. Digging deeper, despite the -2.2% decline in auto production, manufacturing production rose +1.0% m/m, supported mostly by the machinery and the electronics sub-sector.

Finally, the University of Michigan confidence level rose slightly last month (73.3 vs. 72.2), supporting evidence that the biggest part of the economy is helping strengthen the ‘above’ expansion. Improving job figures manage to keep boosting spending which accounts for 70% of the US economy. The consumer also expects the inflation rate to pick up, +3.1% vs. +2.9%, m/m, over the next 12-months.

The USD$ is higher against the EUR -0.63%, GBP -1.03%, CHF -0.60% and lower against JPY +0.32%. The commodity currencies are weaker this morning, CAD -0.65% and AUD -1.12%. The loonie managed to pare a five-day gain on Friday on concerns that the new European austerity measure that are being implemented will eventually cut the prices of raw materials that Canada has abundance of. However on a cross related basis the CAD continues to find strong buyers and has managed to print a 9-year high vs. the EUR as investors seek surety in a currency that has strong fundamentals. Despite being one of the ‘biggest’ losers vs. greenback on Friday, the risk aversion trading strategies that historically require purchasing of the USD in abundance and selling of the loonie are being ignored. The dollar has been in demand vs. most of its other major trading partners and not against its largest. Technical analysts have noted that the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes, but, the countries stronger fundamentals coupled with a ‘rapid’ gold market is bringing loonie buyers on dollar rallies back into the market. Loosening risk aversion will only promote the currency even more.

It’s not surprising with the doubt that the markets are experiencing with the EU/IMF accord that growth currencies have retreated from their initial euphoric high recorded earlier this month. Despite the AUD gaining some initial support earlier last week from a stronger job’s report (+33.7k vs. +22k), the currency has fallen for a third consecutive day against the JPY on concerns that the deficit-cutting measures by EU will eventually inhibit global economic growth, and by default reduce demand for higher-yielding assets. The AUD also weakened before the RBA releases the minutes of its May meeting tomorrow. Earlier this month Governor Stevens hiked rates (+4.75%) and commented that lending costs were back to ‘average’. For now European uncertainty continues to weigh on the respected currency (0.8783).

Crude is weaker in the O/N session ($70.79 down -82c). Oil plummeted on Friday, dipping to its lowest level in three-months, as the robust dollar dampens investors’ demand for alternative investments and on speculation that Europe’s sovereign-debt crisis and rising weekly supplies, signaled that global demand will be slow to recover. Last week’s inventory EIA report showed that stocks climbed for the 14th time in the last 4-months as refineries had various units lay idle. Supplies of crude increased +1.95m barrels to +362.5m vs. a forecasted climb of +1.6m. Inventories at Cushing increased +784k barrels to +37m (the highest level in 6-years). Not helping the cause, refineries operated at +88.4% of capacity, down -1.2%, w/w, the first decline in two months. On the flip side, gas inventories managed to fall, down -2.81m barrels to +222.1m. Analysts had expected an increase of +400k. This was certainly a bear report for the commodity. Of late, both the US economy and the dollars strength and not oil fundamentals have driven the market. The IEA has again cut its estimate of world oil demand this year by -220k to +86.4m barrels a day. According to the same organization, OPEC will need to pump +28.7m bpd to ‘balance global oil demand and supply this year’, that’s -400k barrels less than last month’s estimates. The market will now hone in on the $70 support level. Over the last 5-trading sessions the ‘black gold’ has managed to shave -17% of its value. The market will now rely on fundamentals and the oversupply of the commodity for direction. Expect the market to continue to be better sellers on rallies.

Gold continues to outpace other asset classes and constantly record new record highs (USD, EUR, GBP, JPY, CHF) on concerns that the EU/IMF loan accord to bail out indebted nations in Europe may not be enough to contain the sovereign debt crisis. Friday’s mad surge to own the ‘yellow metal’ took a breather with dealers booking some of the week’s accumulated profits. Investors are speculating that the EU/IMF accord could ‘cement easier monetary policy’ and promote inflation. Europeans it seems want to be in the ‘currency of last resort’ and are using the commodity as their second reservable asset, supplementing their EUR denominated assets. Others have outright been liquidating their EUR holdings and buying gold ahead of a possible ‘dissolution of the monetary union’. With the chances of monetary tightening being postponed is positive for the ‘yellow metal’ as interest rates are an ‘opportunity costs for non-yielding assets’. Year-to-date, the yellow metal has appreciated +14% on European contagion fears, while the EUR has depreciated -13% fueling demand for the commodity as an alternative investment. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on pull backs ($1,236).

The Nikkei closed at 10,235 down -226. The DAX index in Europe was at 6,081 up +44; the FTSE (UK) currently is 5,301 up +39. The early call for the open of key US indices is lower. The US 10-year eased 10bp on Friday (3.45%) and is little changed in the O/N session. It’s no wonder that the $78b issued last week went so well. Treasuries prices have continued to climb, despite stronger US data being posted on Friday, as the demand for the ‘safest assets’ rose on speculation that Europe’s sovereign-debt crisis will limit growth and lead to the eventual breakup of the EUR. The 2/10’s spread again has widened to 266bp as the flight to quality remains very much entrenched.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell