USD currencies still expected to gain vs. EUR currencies

The latest IMM data covers the week from 15 to 22 June.

Net long USD positions were reduced slightly for a second week as the USD rally has begun to lose steam. Still, non-commercial investors are net long the USD against all the EUR currencies (GBP, EUR and CHF), but net short the USD against all the other G10 USD currencies (MXN, CAD, AUD, NZD, and JPY).

As EUR/USD failed to break above 1.25, after correcting higher from its 7 June 1.1877 low, non-commercial investors have added fresh EUR shorts – taking net short EUR positions to 32% of open interest. This should imply that the upside risk to EUR/USD from a position squeeze has increased again, although there is still room for the market to add further short EUR/USD positions before reaching the crowded positioning levels seen during May – where net shorts reached 40% of open interest.

Non-commercial investors turned net long NZD again after briefly having been net short during the past two weeks. However, open interest is currently quite low in NZD, which means that one should be careful not to read too much into the data.

Open interest has declined in most currencies, potentially indicating lower liquidity in the market going into the summer period – though other factors could easily be driving this. Thin summer trading could be expected to bring higher volatility on the market. However, in previous research (see FX Crossroads: Post vacation blues), we have highlighted the lack of empirical evidence supporting this hypothesis. While there are signs that liquidity does indeed decrease during July, implied volatility does not seem to pick up. In contrast, implied volatility tends to pick up in the autumn

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

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