UBS Data on Hedge Fund Positioning
16/11/09 23:32
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UBS Data on Hedge Fund Positioning
With the S&P500 and EURUSD close to their highs again after a brief foray lower, the question investors are asking now is whether we can eventually push higher through these levels or whether recent congestion is a sign that the rally higher is over. One key input to that analysis is positioning data. We think focusing on positioning and flow from fast money is the best indicator as to whether the big levels can be broken to the topside.
From looking at EURUSD speculative positioning data (in USD bn) from CFTC two points are immediately clear: (a) Recent long positioning peaked on Oct. 6, just after the soft non-farm payrolls release on Oct. 2 (b) In terms of absolute size of positioning, the recent peak was far lower than the 2007 peak, shortly after which EURUSD reached 1.5991.
In looking at data derived from the UBS hedge fund customer flow database. UBS hedge fund clients have been consistent buyers of EURUSD since March, when the S&P 500 reached its low. However, to get a better "feel" for their positioning at any given time, we analyze their flows on a rolling 20-day and 5-day average basis.
The most extreme recent 5-day buying period ended on Oct. 1, a day before the soft payrolls report. Since then net EURUSD buying has decreased significantly, except for the week up to Nov. 3. The more medium-term 20-day rolling average saw its most extreme (recent) level on Oct 6.
Net, net, UBS hedge fund client positioning is a long way from the extreme levels seen historically. They remain long EURUSD, but have been much longer both recently (early Oct) and in June. Taken together, the CFTC and UBS flow data both suggest that positioning offers no insurmountable obstacle to further EURUSD upside, although global risk appetite will have the final say on the matter.
USD: Dollar checks gains but on firmer footing
There was a lack of follow through in risk aversion overnight as markets in both Asia and Europe are showing mixed performance. The dollar failed to make significant headway after yesterday's strong gains, trading in a range of 1.4834-1.4902 against the EUR and 89.70-90.52 against the JPY.
The latest jobless claims data showed a drop in both new and continuing claims. New claims fell to 502k (cons 510k, UBSe 515k); continuing claims fell to 5631k. Some of the drop in continuing claims partly likely reflects exhaustions, with recipients running out of eligibility to make regular state claims. Meanwhile, the mortgage applications purchase index fell for the fifth straight week, down 11.7% w/w to 220.9. The recent weakening probably partly reflects the first-time homebuyer tax credit, which had been scheduled to expire Nov. 30 and probably pulled forward some demand.
The University of Michigan confidence index is expected to increase slightly to 71.0 but our forecast is for a slight drop to 69.5, as the index has repeatedly weakened early in the month before recovering on several previous occasions. Price action has been choppy this week as the lack of data and the holiday seemed to cause liquidity to shrink for the time being. The dollar should benefit as we see pullbacks in risk seeking heading into year-end.
ECB Governing Council Member Bonello said growth forecasts for December could be revised upwards based on recent survey information and hard data. He also said non-standard measures would be removed gradually so as not to disrupt markets. Regarding FX, Bonello said there is a growing consensus for a strong dollar against the EUR and other major currencies and that the ECB considers FX moves as they affect price developments. Trichet's comments on FX were more nuanced, as he said a strong dollar is in US interests.
Both Prime Minister Key and Finance Minister English expressed concern over current NZD strength, noting that it posed a "challenge" and had a negative impact on exporters. In addition, English predicted the USD would fall further, and forecast a slow recovery for the domestic economy.
Source: UBS, Bloomberg, Chris Lori