Investors turn short CHF as 1.20 floor proves credible

The latest IMM data cover the week from 27 September to 4 October.

Speculation about higher EUR/CHF floor drives position re-balancing: For the first time since mid-2010 when the Swiss National Bank (SNB) abandoned its first rounds of interventions on the currency market, non-commercial investors have turned net short the Swiss franc. As a share of open interests, net short positions reached 4 percent last week, which is broadly the historical average. We doubt that a hike of the 1.20 floor is imminent (though obviously on the SNB wish list), but are still positioned for a bigger EUR/CHF movement via a zero cost option strategy (see FX trade recommendation, 23 September).

Long dollar positions remain stretched: Investors have maintained significant long positions in the dollar against not least GBP, EUR, and MXN. Positioning is most stretched against GBP, but with the Bank of England embarking on a new round of quantitative easing, we still view GBP as vulnerable to a further build-up in short positions.

Stabilisation in negative EUR momentum: The market remains short EUR/USD, but positioning has stabilised as has spot. Downside risks to the euro still exist, but as European politicians move closer to a recapitalisation of European banks, an important source of euro weakness is losing strength. The fact that the ECB kept rates unchanged has also supported the euro, and while we still need a stabilisation in macro data to rule out ECB cuts, the potential for a EUR/USD rebound has increased. Hence, risks are now that improved economic data and/or a European policy response could trigger a position squeeze and see an accelerated rebound in EUR/USD. We will await more clear signs of a macro stabilisation before positioning fully for this, however

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

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