EUR shorts increased, USD longs rose sharply – Rabobank

Piotr Matys, EM FX Strategist at Rabobank, lists down the IMM Net Speculators’ Positioning as on 11 October 2016.

Key Quotes

“Bearish bets against the pound have been trimmed modestly in the week ending October 11. It seems that the GBP bears decided to take some profits after sterling plunged to another year-to-date low against the US dollar in October (in fact the lowest in more than 30 years). The negative sentiment towards sterling is likely to dominate over the mid-term horizon as the market will try to assess whether the UK will opt for a soft or hard Brexit. We expect GBP/USD to fall to 1.18 on 6-9m horizon and EUR/GBP to edge higher to 0.92.

EUR shorts increased to the highest level in two months. It is worth pointing out that EUR/USD has been front heavy since the beginning of October amid growing market expectations that the Fed may raise rates at the end of the year, which provided the US dollar with a boost.

USD longs rose sharply as the market has started pricing in a higher probability of a Fed hike. The implied odds that the Fed may end this year with a hike increased to around 68% from 59% at the end of September. The bullish case for the US dollar, however, may fade over the mid-term horizon given that the Fed may once again opt for a prolonged pause in the tightening cycle, as was the case after raising rates in December 2015.

MXN short positioning was scaled back significantly with a 40% reduction in net shorts. This came as US Presidential polls showed Hillary Clinton pulling ahead of Donald Trump. While the peso is the most sensitive EM currency to US politics, the final presidential debate scheduled on Wednesday will set the tone for other risky assets.”