Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week : Trader positioning in the euro
Christopher Dembik
Head of Macroeconomic Research
Summary: Our 'Macro Chartmania' series collects Macrobond data and focuses on a single chart chosen for its relevance.
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This week, we look at trader positioning in the euro. These are the main highlights from the CFTC Positioning Report:
• Extreme positioning in the euro remains at place. EUR shorts are now close to their historical lows, at 52K contracts while, on the opposite side of the road, EUR longs are still close to their highest annual level, at 230.6K contracts. The positive mood surrounding the single currency is prevailing in the FX market despite risks related to the second COVID-19 wave currently hitting Europe. Many traders are still betting on a faster economic recovery in the euro area than in the United States.
• The prospect that the ECB could also review its bond purchases in the APP program by adding more flexibility to issuer limit and capital key, as revealed by the Financial Times over the weekend, could also continue to fuel positive sentiment towards the euro. The large political endorsement of the ECB policy ahead of the Karlsruhe ruling has been viewed by many market participants as the signal that the central bank has almost unlimited firepower to support the economy and won’t be constrained in the future by legal considerations.
• In the short- and medium-term, positive sentiment is likely to continue to dominate but, as mentioned by our Head of FX Strategy John Hardy last week in his daily FX updates, the EURUSD “has to build a lot of further energy to pull clear of the 1.1900-1.2000 zone that has capped the action for about six weeks now”. Said differently, the currency cross might continue to evolve in a narrow range comprised between 1.1800-1.1900 in the coming sessions in the absence of real market movers.
• The recent appreciation in the euro area exchange rate has been viewed by many economists and analysts as hindering the economic recovery in the monetary union but if we look at the fair value of the euro, by referring to the REER (Real Effective Exchange Rate), the single currency is still undervalued by more than 21% versus the USD. Therefore, we think it is rather unlikely that the ECB will really try to talk down the euro in the coming months, even in the case the single currency would keep moving upward. We are not even close to high risk area in terms of exchange rate level.
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