The squeeze of long USD/short risk positions continued for a second week, according to our proprietary flows through Friday October 16 (Chart 1 and Heatmap 1). Hedge funds sold USD against high beta currencies in G10 and EM last week. Real money flows were mixed in G10, but mostly positive in EM.
This positioning squeeze should have now run its course. Both positioning analysis based on our proprietary flows and the CFTC data suggest that the market is now short USD and long risk for the year (Chart 2).
The EPFR data also reflected two-way flows in the week ending October 14. This evidence suggests more balanced risks looking forward.
A further increase in risk appetite will depend on central bank action, starting with the ECB this week.
Meh. The ECB won’t cut it. That will only put more pressure on the US dollar, hitting EM and commodity risk. Same goes for Japan. If you’re waiting for China to cut rates again that won’t do it either (beyond the very short term) because it will pressure the yuan to fall.
The only central bank that can reignite the EM and commodity rally for any sustained period is the Fed if it crashes the US dollar and it is not moving to QE4 until things get much worse.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
