Soft equity markets see a reduction in USD shorts

Danske Research Team from Danske Bank A/S at 11/02/09

 

The latest IMM data covers the week from 20 to 27 October. Speculative investors pulled back some of their dollar shorts from the high level seen in the week prior, as risk sentiment deteriorated and financial markets became nervous about the sustainability of the Q3 earnings driven rally. Risky assets continued to sell off last week and given the price action in the dollar it is likely that dollar shorts have been reduced further. The past week’s price action illustrates that the stretched speculative positions that have been built up in recent months are leaving the market with a high risk of abrupt price movements on risk pull-backs. The drop in AUD, NZD, CAD – and to some
extent EUR/USD – last week is indicative of such a position squeeze.  While risk exposure is likely to have been reduced further following the collection of IMM data, NZD, AUD and CAD still look most at risk from a position squeeze – while GBP could benefit from a less dovish than expected Bank of England on Thursday.  Despite the pull-back in risk USD/JPY has remained somewhat rigid and it is worth noting that long JPY positions are now well below 20% of open interest.