Growing divergence with option market positioning

The latest IMM data cover the week from 10-17 January.

Investors added marginally to EUR shorts: EUR/USD reached a 1.2624 low on 13 January and has since rebounded on improved risk sentiment and growing expectations of a Greek PSI deal. Nonetheless, investors still added marginally to short EUR positions in the week to 17 January - taking net positions to 53 percent of open interest. Short positions are likely to have been partly unwound since the IMM data was collected, but even decent short covering would still leave IMM positioning at odds with option market positioning. While investors covered by the IMM data remained very short the euro going into 2012, demand for EUR put options has fallen significantly on the option market - causing EUR/USD risk reversals to narrow. So how should we interpret this divergence? One explanation could be that the IMM is not a good proxy for overall positioning at the moment and that investors are not as short euro as reported. Another explanation could be that investors are more willing to add short euro positions in the spot and futures market than in the option market given the sticky spot price. Regardless of the explanation, the market is likely to remain quite short euro, which could allow for a further spot rebound towards 1.32 resistance should a Greek debt swap agreement be reached.

Long dollar positions at risk: There were several reasons to add long dollar positions towards the end of 2011, including: (i) global recession fears, (ii) European debt roll-over risks, (iii) US economic outperformance, and (iv) Chinese recession risks. However, these dollar buy signals are now fading leaving near record USD longs at risk. Not least the significant long positions against CAD could be unwound if spot breaks below parity. As a result, we see further potential in the commodity currencies against the greenback

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

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