Stretched positioning facilitates post-summit EUR gains

The latest IMM data cover the week from 11 to 18 October.

Short EUR positioning may have contributed to EUR's rally: While the weekend's EU summit yielded little concrete news in terms of the core issues (bank recapitalisation, boosting the EFSF and the level of PSI in Greece), EUR/USD has nonetheless staged a significant rally since Friday. Besides the continued improvement in US economic data, signalling that recession fears are exaggerated, a factor facilitating the rally has likely been the significant short EUR positions in place, reaching levels close to 34 percent last Tuesday. While the recent rally is likely to have caused an unwinding of a good chunk of the shorts, we suspect that investors remain short the single currency. Thus, further unwinding, e.g. triggered by a 'comprehensive package' being presented on Wednesday, may have the potential to drive EUR/USD to levels above 1.40. That said, downside risks have not abated; our preferred short-term model points to fair value at 1.37. For further details on the weekend's summit,

Significant JPY longs likely to remain in place: The latest IMM data cover the week ending on Tuesday 18 October, and the liquidation of JPY long positions may thus reflect the rise in USD/JPY to levels around 77.5. However, following Friday's sudden collapse in the spot to sub-76 levels, we suspect that non-commercial investors have put on new JPY long positions. This would be in line with option market positioning indicators, i.e. the USD/JPY volatility skew having turned significantly to negative territory since Friday (JPY calls commanding a larger premium relative to similar put options).

Build-up in commodity currency long positions continues: Mirroring the continued bettering in market sentiment over the week covered by the IMM data, non-commercial investors have added to long positions in AUD and NZD, while CAD shorts have been trimmed marginally. Positioning does look stretched particularly in NZD, however, and long positions could be exposed if the European debt crisis flares up again or if the positive momentum in US economic data surprises deteriorates.

Danske Bank
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