Currency markets are backing the view that the eurozone economy is getting on track.
According to ANZ’s weekly summary of US Commodity Futures Trading Commission (CFTC) figures, traders took a net long position in the euro for the first time since 2014.
Net positioning is calculated as the sum of long futures and option positions less short positions in a particular asset class.
For the week ended June 13, leveraged funds purchased a net $US1 billion of euro which took closing net long positions to $US0.9 billion.
It follows a run of good data in 2017 which points to a European economy that may finally be turning the corner.
PMI readings across the eurozone have consistently beat expectations and inflation is climbing, although underlying inflation remains below the European Central Bank’s stated mandate.
It’s led to more chatter on markets recently about how and when the ECB will begin to unwind its stimulus measures, starting with a reduction of its bond purchasing program.
Perhaps not surprisingly then, the euro is starting to see more demand. Although for now, the ECB has been clear in its view that it needs to see more evidence of growth in underlying inflation before upgrading its forward guidance.
While traders are getting more bullish on the euro, leveraged funds were net sellers of the US dollar for the fourth week in a row.
According to ANZ currency strategists Khoon Goh and Rini Sen, “overall net long USD positions were reduced by $US2.4 billion to $US9.2bn, the lowest net longs since February this year”.
After a fourth straight week of selling, net long positions in the US dollar have fallen by $US7.3 billion since reaching $US16.5 billion in the middle of May.
This chart shows how net long positions in the US dollar have recently fallen, while the euro ticked above zero for the first time in three years:
Recent figures suggest that a slight divergence has arisen between the US Federal Reserve and markets in the outlook for the US economy.
In comments last week accompanying its interest rate rise, the Fed said that recent weakness in inflation indicators were likely to be only temporary.
Despite the rate rise, US bond yields remain low and the US dollar index has battled to stay above 97, which is its lowest level since last November’s US election. Markets are seemingly placing more emphasis on a recent run of data misses in assessing their outlook for the US economy in the second half of 2017.
“With the FOMC dot plots still signalling one more hike this year and the possibility of balance sheet reduction later this year, positioning is likely to be more sensitive to the US data pulse,” said Goh and Sen.
The two analysts also noted that net short positions in the UK pound increased from $US0.6 billion to $US1.3 billion, with increased political uncertainty stemming from the surprising result in the UK election.
Weakness in the pound was contrasted against demand for emerging market currencies. According to Goh and Sen, combined net long positions in the Mexican peso, Brazilian real and Russian ruble reached $US3.2 billion – the largest net long position since 2013.
Among the commodity bloc, each of the AUD, Canadian dollar and Kiwi saw net inflows of $US0.3 billion for the week ended June 13.
Although leveraged funds still have a net short position in the Aussie dollar, the extra demand last week took net shorts in the AUD to their lowest level in a month.
ANZ uses non-commercial positions reported by the CFTC as they are “commonly seen as a proxy for leveraged positioning as they seek to profit from movements in the asset price as opposed to hedging business activities”.