On Wednesday, Bank of New York Mellon’s FX analyst Simon Derrick proffered some wise words on the matter of currency speculation and the recent sell-off in both the euro and pound.
Just like FT Alphaville, Derrick has cautioned that a little perspective is needed when reviewing the CFTC’s weekly International Monetary Market (IMM) open-interest figures.
That’s because while these numbers are becoming the data set du jour of the financial media world, they’re not really to be taken at face value, since they only represent a small slither of the market.
In which case the shorting indicated only holds true of the exchange-traded futures market, and does not reflect the position of the much larger cash market.
As Derrick explained, emphasis ours:
Data from the futures markets does not tell us everything. Much is being made of the fact that the latest CFTC positioning data shows speculative players holding a record short EUR position.
Although this is true, it most certainly does not reflect the positioning of the investment community as a whole. In particular, it is worth remembering that between the start of 2002 and Q3 2009, FX reserves globally rose from just over USD 2 Trn to USD 7.5 Trn.
Given that almost all of this growth came in the reserves of emerging and developing nations (save for that accumulated by Japan during its extraordinary intervention campaign in the early years of the last decade) and that 31% of the know allocation (basically everyone except China) have been pushed in EURs, it seems reasonable to suppose that the reserve managers of this world still own a good amount of the single currency.
Add in to this the holdings of the mutual and pension funds that have built up their holding over the past decade in the face of a persistently declining USD (our flow data for German Bund holdings amongst investors rises at a very steady pace from late 2001 onwards – the point that the USD decline began to emerge), and it seems to us very likely that the investment community remains structurally long the EUR.
That said, there is increasing evidence that hedge funds are ratcheting up FX positions as an alternative, non-CDS focused means of playing country-risk, on fears an imminent regulatory backlash.
In which case, the upsurge in IMM speculative shorts might be reflecting this shift in strategy.
Related links:
‘Talk of a GBP crisis seems like hysterical claptrap’- FT Alphaville
Hedge funds to ratchet up euro bets - FT
Next up for hedge funds: The Greek Inquisition – FT Alphaville