From Citi FX ‘Strategy Weekly’ client note for this week.
It asks, Why the EUR resilience? – EUR has remained resilient despite investor positioning and cross asset weakness
- Points out that Citi data indicates that funds have been short EUR nearly all year and the current reading is
-1.75 out of a maximum of -3
- Global Flows, reflecting a larger and more diverse sample of clients, tells a similar story. According to our data, investors (an aggregate of all hedge fund, CTA and real money accounts) have been net EUR sellers since January
- The publically well-known IMM Commitment of Traders Report highlights speculators are short $10.4bn EUR (roughly 60k contracts). CTA’s moved from long positioning to short in May
Says (bolding mine):
- Three separate sources of data all reach the same conclusion… but still EUR refuses meaningfully adjust lower – implying there is another client type in the market selling enough USDs to offset the investors mentioned above. Evidence is building reserve growth and rebalancing is in play.
More (again, bolding mine):
- It is well known that China has been accumulating reserves in record amounts and the combination of CNY weakness and reserve accumulation was a dominant Q1 story.
- EM Asian –xChina reserve accumulation also; the cumulative 55bn of reserve accumulation from March-June is the strongest growth since October 2013, the month that EM rallied heavily after the Fed held off on QE tapering
- Historically, the EM Asia-xChina reserve growth holds the strongest correlation to EUR/USD, greater than either LatAm or Oil Producing countries or China
- . What gives us confidence there is a greater story at hand is these regions are seeing similar reserves growth as well, so adding to our bottom line
- So long as capital flows remain EM bound and volatility low, reserve accumulation is likely to continue, implying USD buying/EUR selling will remain a long hard slog.
