Dollar squeeze not yet visible in IMM data

The latest IMM data cover the week from 4-11 October.

Dollar squeeze not yet visible in IMM data: The IMM data are as always published with a delay and hence do not fully reflect the broad-based dollar decline last week. The DXY dollar index has now lost 4% since its early October high and more than 1% since the IMM data were collected. Still, data show that non-commercial investors had added marginally to net long dollar positions – now at USD14.6bn. Last week’s position squeeze is likely to have seen a good part of these unwound (not least against EUR and commodity currencies), but we still suspect that investors remain net long the dollar. This in turn leaves potential for a further depreciation should economic data continue to surprise positively and/or the earnings season boost risk sentiment further. We see the biggest upside potential in the commodity currencies: AUD, CAD and NZD.

Short EUR positions likely to have been squeezed: Net short EUR positions were cut marginally to 33 percent of open interest but, as EUR/USD has since broken above 1.38, this is likely to have coincided with a further short squeeze. The question now is, will investors turn net long the euro? We doubt it, which suggests that the EUR/USD rebound is less likely to see spot return to the mid 1.40s. As long as recession risks remain high in Europe, and hence also the probability of ECB rate cuts, we expect positioning to be fairly neutral. We thus still look for the bigger EUR/USD rebound to take place in 2012 and not over the coming months

Danske Bank
http://www.danskebank.com/danskeresearch

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