FX Positioning: Dollar Longs Rose Into The Fed Meeting

CAD and NZD worst hit by rise in USD longs

Two of the currencies that still had a respectable net-long positioning – CAD and NZD - were those that saw the largest short-squeeze in the week ending 27 July. Indeed, their high beta to global risk sentiment also contributed to the drop in positioning. Both CAD and NZD have had a very similar net-positioning (in open interest terms) lately and they have now moved to a neutral positioning, with net-longs only worth 3% of open interest (FXC).

Both currencies are indeed backed by hawkish central banks, although policy adjustments by the Reserve Bank of New Zealand have been more meaningful, as the asset purchase program was terminated in July and we expect a first hike either this month or in October (much will depend on this week’s jobs data in New Zealand). For this reason, we think NZD’s upside potential is higher than CAD’s, although the downside risks for NZD have also risen lately, given the high exposure of the Kiwi economy to China.

Elsewhere in the G10, EUR/USD positioning was at 6% of open interest and only the Swiss franc (FXF) presented a more pronounced overbought condition. As mentioned above, and often reiterated in our FX positioning commentaries, the CHF positioning as reported by the CFTC is often detached from actual market sentiment on the currency and should be taken with a pinch of salt (FXE).

The Japanese yen and Australian dollar remain the biggest shorts in the G10. For the yen, this is a bit surprising considering how US interest rates have continued to edge lower (which normally triggers stronger interest in JPY). For AUD, it is surely less of a surprise, as the currency has recently been caught in the crossfire of unsupportive external risk factors and a domestic central bank that is lagging most of its peers (especially in New Zealand, Canada and Norway) in the policy normalization process (FXY, FXA).

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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