The surprise decision by the FOMC not to taper asset purchases has unsettled market with many market participants who were previously proponents of the US growth story have had their confidence shaken, almost as if the FOMC knows something that we don’t.
In this regard, Goldman Sachs points to a very particular aspect to the recent Fed surprise which show large an impact there has been to FX positioning.
"Overall USD long positioning built to $21.7 bn just ahead of the surprise announcement that Larry Summers had withdrawn his name from consideration for the Chairmanship of the Fed. The first reading of the CoT report following that announcement saw overall USD longs drop to $10.7 bn, a three standard deviation decline (based on weekly moves in the CoT report since 2005). Following the FOMC “no taper” surprise, the latest CFTC report (for Sep. 24) shows a further drop in overall USD long positioning to $2.4 bn, another drop in excess of two standard deviations," GS clarifies.
"Looking under the hood, what has happened with FX positioning is even more notable. Even as USD positioning has moved back to flat, this has come because EUR longs have grown to the biggest position since May 2011. Overall, the Fed surprise has therefore caused the market to lose confidence in the bullish case for USD. Instead, the market has re-discovered EUR as its favourite, while keeping a very sizeable shorts against JPY," GS adds.
So what does this mean for the current EUR longs in the very near-term?
"The emergence of borderline stretched EUR long positions is notable not least against the backdrop of this weekend’s uncertainty over the governing coalition in Italy, not to mention the possibility of a government shutdown and the debate over the US debt ceiling, which could – in the very short term – put both positions under some unwinding risk." GS warns.
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