Traders Still Betting on Further Gains for Pound Sterling, Just not so Enthusiastically
A comprehensive study of how foreign exchange traders are betting confirms expectations for further gains in Sterling are elevated but enthusiasm has dipped over recent weeks.
"GBP long positioning is reduced but remained large," says Gek Teng Khoo a strategist with Morgan Stanley who has just analysed a huge set of data to gain insights into how the global trading community is positioned with regards to Sterling.
Image courtesy Morgan Stanley
'Long positioning' is taking a position on the markets that seeks to profit from future gains and when markets are 'positioned long' it suggests there is a consensus for further strength.
But, "large long GBP positioning poses a downside risk for the currency should this week's UK
data disappoint or risk appetite turns sour," adds Khoo.
When markets are heavily positioned in a similar direction it can be the case that there simply are enough new entrants into the trade to keep it moving forward. Indeed, if traders start to exit that trade a sharp reversal can take place.
This could explain some of Sterling's February underperformance.
"All investors in our positioning tracker were GBP sellers except Japanese retail accounts. Non-commercial IMM accounts continued to sell for the fourth week, bringing their long GBP positioning to the smallest since last December. This was led by leveraged funds selling while asset managers were buyers," says Khoo.
Image courtesy Morgan Stanley
The Morgan Stanley analyst says global macro funds resumed selling GBP after briefly turning into buyers last week.
"GBP sentiment also deteriorated, becoming more in line with most other G10 currencies after being the currency that traders were most bullish on throughout most of December and January," says Khoo.
Morgan Stanley base their analysis on a wide set of data from different providers to gain as comprehensive as possible view of the positioning of currency traders.
Included are the following sources:
- IMM – Morgan Stanley use the U.S. CFTC’s IMM report to track positioning of non-commercial traders.
- Toshin – The Toshin accounts are Japanese foreign currency investment trusts that seek yield abroad by investing in foreign assets on a currency-unhedged basis.
- TFX – The Tokyo Financial Exchange (TFX) measures Japanese currency trading on margin accounts, and comprises an estimated 10% of the retail margin market.
- Beta – As an alternative proxy for positioning, Morgan Stanley's Beta-Tracker measures one- month rolling betas of global macro hedge funds’ daily returns on major currency indices.
- ETF – The Morgan Stanley FloMo provides daily indications on cross-border equity flows from US ETFs
- Sentiment – The Daily Sentiment Index is a survey of traders and measures short-term market sentiment among futures traders. It gathers opinions on all active US futures, Eurozone interest rates,and Eurozone equities futures market.
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