Positioning Trading Model Update: Bullish GBP/USD, Bearish EUR and JPY

Summary

• We regularly monitor investor positioning, but we are also now going one step further and using positioning and flow to generate direct trading signals.
• We look at trading models using hedge fund, real money and small investor positioning data as well as options markets and momentum data.

Market Implications

• Our latest update finds ‘sell’ signals for EUR/USD, ‘buy’ signals for USD/JPY, and ‘buy’ signals for GBP/USD. The first two support our overall bullish US dollar view, while the GBP signal goes against our bearish UK view.

The Latest Signals

EUR/USD – ‘Sell’ Signals

• Over the past three months, the best model has traded against hedge fund flows. The model has gained +7% over the period. This week, it switched to signal ‘sell’ from ‘buy’ last week (Table 1).
• The other top-performing models have traded against real money positioning and followed small investor positioning. Both are giving ‘sell’ signals.

USD/JPY – ‘Buy’ Signals

• The best-performing model over the past three months has followed small investor positioning. The model has gained +11%. Currently, it is giving a ‘buy’ signal (Table 2).
• Risk reversals and momentum have delivered similar returns and are also giving ‘buy’ signals.
• One model (hedge fund flow) has performed well (3M: +4.4%) but it now gives a ‘sell’ signal. If this switches to signal ‘buy’ then we would have a higher level of confidence in buying USD/JPY.

GBP/USD – ‘Buy’ Signals

• Following small investor flows has performed best, it returned +13% over the past three months. Currently, the model is giving a ‘buy’ signal (Table 3).
• The other well-performing models have followed extreme real money positioning and traded against extreme risk reversal levels. The former is giving a ‘neutral’ signal while the latter is giving a ‘buy’ signal.

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.)