One of the biggest fears for investors is jumping onto crowded trades. With everyone positioned for the move, it makes it even harder for news to move markets in the direction of the trade. After all, it’s surprises that drive markets. It’s therefore crucial to determine how investors are positioned in any given market.
While no measure is perfect, aggregating several measures can go a good way towards capturing positioning. Using this philosophy, we’ve built positioning measures for G10 FX. We plan to extend them to other markets too, but for now, here’s the breakdown.
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One of the biggest fears for investors is jumping onto crowded trades. With everyone positioned for the move, it makes it even harder for news to move markets in the direction of the trade. After all, it’s surprises that drive markets. It’s therefore crucial to determine how investors are positioned in any given market.
While no measure is perfect, aggregating several measures can go a good way towards capturing positioning. Using this philosophy, we’ve built positioning measures for G10 FX. We plan to extend them to other markets too, but for now, here’s the breakdown.
The Nuts and Bolts
We combine four measures: the net positioning of asset managers on future exchanges (IMM), the net positioning of hedge funds on futures exchanges (IMM), risk reversals from FX options, and consensus FX forecasts. The two IMMs are the most direct measure of positioning but are lagged and less frequently updated. Risk reversals on the other hand are very up-to-date and capture sentiment among short-term players, while the consensus forecasts of FX analysts should capture medium-term views well.
We compare the latest values of reach to their past year’s history. If the value is at the top end of its range, then we take that as ‘very long’ signal. If the value is at the bottom end of its range, then we take that as ‘very short’ signal. We equally weight the measures to arrive at an overall reading for each currency.
The Results
So, what are latest signals? We find investors are most long JPY, CHF, and NOK. They are most short GBP, EUR, and AUD. This could partly explain why the recent GBP rally has been so sharp (investors are being forced to exit shorts). Likewise, recent NOK weakness could partly be due to excess long positions being unwound.
As for overall dollar positioning, it is close to flat. That hasn’t always been the case, however. Over Q2, investors were long dollars, then they flipped short over the summer. Now investors are not so sure.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)