BNY Mellon

EUR holdings data for this week shows shorts in excess of those seen in the post-pandemic days of October 2020 (see chart). Back then, investors were caught offside as such shorts turned sour, with profitability deteriorating thereafter. In fact, profitability patterns show that the market still is quite biased to long USD positions.

In the chart below we calculated scored holdings of all aggregated EUR forward and swap positions in the iFlow database. These exposures are subsequently scored using a trailing 1y standard deviation. We then smooth the data with a trailing 1m average. Negative readings indicate that investors are holding short EUR positions against all other currencies, e.g., GBP, USD, GBP, CHF, etc. The dark line denotes the profitability of these positions.

In recent weeks investors appear to have been correctly adding to short EUR exposures. This would be in contrast to 2020, when short EUR exposures resulted in additional losses as the world continued to recover in the post-pandemic months.

A bias to short EUR positioning is not new. In fact, average monthly scored EUR holdings since the onset of the European sovereign debt crisis until now was -0.8, against -1.44 currently and -1.9 back in October 2020. The most successful short EUR trade in our sample occurred back in 2013, when profitability surged as high as 1.8% for all exposures in our data. The peak in profitability took place over one year later, in January 2015.

The market caught the EURUSD decline from 1.40 in May 2014 to 1.045 in March 2015. The backdrop then was divergence in policy stances between the Federal Reserve and the European Central Bank. The Fed was clearly signalling an end to its bond buying program, while the ECB expanded its balance sheet from EUR2trn to EUR2.8trn in 2015.

Fast forward to 2022, and both the Fed and ECB are not only hiking interest rates, but also reducing the size of their balance sheets – almost at the exact same pace. The Fed’s balance sheet peaked in April, and the ECB’s in June. The Fed’s dropped from $8.97trn to $8.88trn, and the ECB’s from EUR8.84trn to EUR8.75trn.

ING

The dollar continues to retrace the mid-July to mid-August sell-off. It is hard to pin down the exact reason for dollar strength – after all, US yields have softened a little over recent sessions. However, the move suits our generally positive stance on the dollar at a time when European and Asian growth prospects remain challenged.

There is very little on the US data calendar today (the Fed’s Tom Barkin speaks at 1500CET). Barring some very poor pieces of US data (next week’s data calendar looks second-tier) or some surprising recovery stories overseas, we would expect the dollar to consolidate near the recent highs.

DXY broke the 107.50 level, however getting to 108.00 should be significantly more difficult.