Pound to Euro looks weaker going into the new weak; 'risk should to continue to rally'

Written by Sam Coventry Monday, 13 February 2012 13:20

The pound euro exchange rate is lower by over 0.1%; GBP-EUR is at 1.1925.

"Assuming no upset in the Greek debt deal, risk should continue to rally and EUR-correlated currencies should benefit short-term, in particular AUD, MXN, KRW and SGD. But with option-market indicators such as the VIX showing signs of basing and China data slowing, these are good levels for leveraged funds to be buying G10 and EM FX vol against cash longs, particularly on those currencies that have led gains – such as NZD, AUD, INR, MYR and ZAR," says a morning exchange rate note from Standard Chartered.

According to Standard Chartered:

Positioning has been a key driver of the euro’s (EUR’s) move higher on optimism that a Greek debt deal would be agreed.

The basic IMM Commitments of Traders data to 31 January showed ‘non-commercial’ accounts with net short positions of -155,987 contracts.

The disaggregated CFTC data showed ‘leveraged funds’ (hedge funds and systematic trading models) net short 90,575 contracts, but ‘asset managers’ net long 25,388.

Historically, weekly moves in EUR-USD are highly correlated with weekly changes in leveraged fund positioning.

The next data set as of 7 February (reported 10 February) may show a drop in EUR-USD shorts.

However, given the size of the position, both flows and technicals appear supportive for EUR-USD near-term.