USD buying hitting pause, positioning still favourable for JPY downside - BofAML

Research Team at Bank of America Merrill Lynch, notes that the USD buying took a breather through Thanksgiving week with subdued hedge fund demand and selling from real money while the overall USD positioning still does not look stretched, but there is a risk some HF longs could be trimmed; would buy on dips.

Key Quotes

“USD buying taking a breather

USD buying hit pause through Thanksgiving week, with very subdued demand from hedge fund clients and real money clients reverting back to selling after two weeks of strong buying. We have been noting less commitment from this client sector, which has the most room to add to USD positions. Overall USD positioning does not looked stretched, but there is a risk that some hedge fund longs are trimmed considering the speed of the move since the election and the lower conviction seen in the flows. With no changes to the fundamental outlook for higher US rates and higher USD, we would consider any pullback to be a buying opportunity.”

“EUR/GBP vulnerable to squeeze higher

EUR shorts have been building ahead of upcoming Eurozone event risks, with the Italian referendum and Austrian Presidential election re-run both this Sunday, December 4th, just days ahead of the ECB. Conversely the GBP short has moderated as better UK data and the shift in focus away from UK and toward Eurozone politics continued to benefit GBP. As the event risk of the Italian Referendum passes and attention turns to the ECB rate decision, positioning suggests risks of a squeeze higher in EUR/GBP on any policy disappointment. In addition, the focus is likely to turn back to UK politics with the start of the Supreme Court Appeal on triggering of Article 50 next week.”

“Positioning still favourable for JPY downside 

Despite the sharp JPY moves post US-election, positioning still suggests room for further JPY downside. Similarly to USD, the disparity between hedge fund and real money positions could flag some near-term risks of pullbacks, but would ultimately represent an opportunity to add to JPY shorts, with USD/JPY on escape velocity toward 120.”