The 6 different elements of FX positioning and sentiment

Author: Eamonn Sheridan | Category: Education

This is from a HSBC note on the EUR I saw during the week and I though I'd pass it along for some weekend reading

HSBC discussing this in the context of the EUR rally, but it also perhaps useful as a way of thinking about flows and their impacts. See what you think.
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Has the EUR rallied too far, too fast, and is a reversal now imminent?
To answer this we look at six different elements of FX positioning and sentiment across three different types of investment horizons and styles.

Fast moving - speculative investors:  
  • FX positioning: long EUR positions have increased but this in itself does not mean a pullback is imminent 
  • FX options: relative call-put prices and call strike levels do not yet suggest the market believes in a much stronger EUR
Medium paced - portfolio managers: 
  • Portfolio flows: no investment pick-up into Europe yet, after years of outflows 
  • Equity market conviction: funds remain underweight on European equities relative to history
Slower moving - reserves holdings: 
  • Reserves managers: EUR holdings are at multi-year lows, and not rising yet 
  • Consensus forecasts: the sell-side does not appear to have become more bullish on the EUR yet; if anything, consensus is showing a lack of conviction
The fast money has become more positive on EUR but not to such a degree that it implies a pull-back is imminent. Meanwhile, the slower moving investors have shown little sign of turning more bullish. If they start to follow the speculators' lead, then EUR-USD could move significantly higher. We maintain a forecast of 1.20 for EURUSD by year-end.
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