Jane Foley, Research Analyst at Rabobank, suggests that in tandem with the paring back of long USD positions over the past year, extraordinarily short EUR positions have been covered.
“Having experimented with negative rates in mid-2014, ECB Draghi went on to whip the market into a frenzy of anticipation ahead of the launch of QE in early 2015. The result was an extraordinary increase in net EUR short positions which started to unwind around March last year. We have frequently argued that the EUR’s safe haven behaviour over the past year or so was a function of short covering.
Now that EUR shorts have returned to more ‘normal’ levels it is likely that the EUR could once again be vulnerable to bad news stemming from the Eurozone and will be less inclined to display safe haven characteristics.
The implication of the change in positioning suggests there is more scope for EUR/USD to edge lower. We are forecasting a move towards EUR/USD1.08 on a 6 mth view, though this assumes the Fed is able to tighten policy later this year. This week’s softer tone in the USD means that on a risk reward basis a long USD position is likely to perform well on a decent payrolls report tomorrow.”
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