Positioning analysis conducted by the exchange rates team at BNP
Paribas show there is scope for euro weakness and dollar strength in
early 2015.
We saw in November that the scope for further dollar strength became limited as a significant portion of the trading community took out pro-USD trades as exposure to the US economic recovery theme grew in popularity. When positions get extended a trend tends to stall as the ability to find fresh buyers in the market becomes limited and thus the potential for yet further gains is compromised. The subsequent soft patch witnessed in the USD towards year-end confirms just how significant a role over-stretched positioning is able to play in the currency markets. We hear from BNP Paribas that the over-exposure to the US Dollar trade has been pared back allowing for the build up of positions needed to take the USD on its next leg higher.
Long USD a Favoured Trade Heading into 2015
“During the second half of 2014, investors began to build a large long position in expectation of the FOMC ending its QE programme in October, in line with the timeframe signalled by Fed Chair Yellen earlier in the year.”“With a score of +36 at year end, long USD positioning is at its highest level in 2014, but below the May 2012 reading, leaving scope for the USD to strengthen further into 2015.”
Analysts at Natixis add to this viewpoint saying:
“The overall environment remains favourable for the US dollar. That can be seen in the significant positions held by speculative accounts, to the point in fact when the currency is starting to be overbought.
“The DXY dollar index has broken above 88 and we see it appreciating further to 90-91 in coming months," Natixis projects."
Euro Likely to Come Under Broad-Based Pressure
At the other end of the spectrum is the euro which has suffered heavily in 2014; more of the same could be in store in coming months warn BNP Paribas:
“At year end, investors appear to be positioned neutral in the EUR, as the ECB disappointed hopes for new measures in December, causing investors to pare back their short EUR positioning from the autumn.
“Going into 2015, we continue to anticipate a substantial broadening of the ECB’s asset purchasing programme, leading to the EUR being used as a funding currency and investors establishing extreme short EUR positions.”
Trend Analysis: USD Still Bullish Despite Recent Losses
December has seen the longer-term trends in the currency market reverse.
“The currency markets have been extremely active this past week.
“Weakness was seen early in the week but a strong dollar recover followed which took the dollar index, USD/CHF and USD/CAD to new highs for the current move and saw the Euro break to new lows since August 2012, and the Aussie drop to its lowest level since May 2010, just pips above our long-term 8050 target.
“Whether there is sufficient dollar strength left to take the dollar to new highs against the remaining currencies remains to be seen.
“Either way, the long-term trend is definitely still bullish and as we have mentioned several times previously, will remain so for the foreseeable future in spite of the inevitable corrections along the way.”
