EUR: Divergent positioning across the board - Nomura

Bilal Hafeez, Research Analyst at Nomura, explains that their survey of positioning gives a mixed signal as FX-focused asset managers and equity investors are very long euros, while FX-focused hedge funds and bond managers are very short euros.

Key Quotes

“Price action suggests investors are not long euros

An initial inspection of market price action suggests that investors are not long euro. Last week the euro rallied and breached 1.10. Soon after, US equities plunged over 3%, and one would have expected the euro to reverse some its gains as investors pared back their positions. Instead, the euro held on to its gains, which suggested investors were not heavily long. Admittedly, a US-centred equity shock could be viewed as dollar negative. So last Friday’s euro-area current account release was instructive – it beat expectations and the euro still saw gains, which again suggested the market was not long.” 

“Hedge funds are short euros

Looking at actual positioning measures, we find that leveraged funds or hedge funds appear to be short euros. Typically, such positioning follows recent momentum, which explains some scaling back of their shorts, but the size of shorts is larger than would have been expected given broader trends in the euro since last year. This suggests scepticism on the part of this investor category.”

“Real money investors are long euros

Longer-term FX investors such asset managers, meanwhile, are long euros. In fact, the scale of their longs is the largest since the financial crisis. It was longer before 2008, though. The positioning can be confirmed by the bullishness/bearishness of FX analysts, who have a similar fundamental-based approach. Currently, analysts have unwound their bearish euro views.”

“Bond and equity funds have divergent positioning too

Another type of positioning to focus on is broader asset manager flows, that is, those that are not necessarily currency risk-takers. This can be proxied by capital flow data by cumulating the net flow into euro-area asset markets since 1999. On the bond side, this shows a large build-up of euro “longs” up to 2014, before this was unwound. This coincided with the euro collapsing from 1.40 to 1.05. On the equity side, a euro “long” has been building since 2010. The equity measure seems less correlated to the euro, but does suggest a possible “long” that could be excessive.”

“Mixed messages, but stronger signals suggest investors are still short

So our survey of positioning gives a mixed signal – FX-focused asset managers and equity investors are very long euros, while FX-focused hedge funds and bond managers are very short euros. Superficially the latter appear to be more important for turns in the euro, which should support a bullish euro view. One caveat would be that expectations of ECB tapering communication appear to be gathering around the upcoming ECB meeting on 8 June, this could pose a short-term downside risk to the euro, but it shouldn’t derail the medium outlook in our view.”