FX Traders ‘Flying Blind’ After a Month Without Positioning Data
(Bloomberg) -- As the partial U.S. government shutdown drags into its 33rd day, analysts are getting creative when it comes to gauging which way certain financial markets are leaning.
The last U.S. Commodity Futures Trading Commission positioning data covered the week through Dec. 18, meaning the most recent snapshot of currencies, commodities and financial contracts preceded last month’s Federal Reserve decision. The figures -- typically unveiled each Friday -- indicate whether speculators are potentially stretched and vulnerable to a reversal.
While the last CFTC numbers showed these traders were about as bullish on the dollar as they had been in almost two years, the currency has dropped more than 1 percent in the past month.
Though the CFTC data set may not give a complete measure of positioning, it’s still useful in navigating the $5.1-trillion-a-day currency market, according to the Canadian Imperial Bank of Commerce. The void has made it difficult to connect unusual market moves with investors’ leanings, as illustrated by the yen’s seven-minute surge one day earlier this month as New York trading ended and Asia’s session began.
“We’re flying blind,” said Bipan Rai, head of North American foreign-exchange strategy at CIBC. “It really comes down to the analyst and their approach, and sometimes you have to be a little more creative in back-testing some of the other tools you’ve built up.”
For Rai, that means more focus on the options market and in particular risk reversals, a put-call barometer of positioning and sentiment. A peek at these contracts suggests traders favor the greenback versus resource-sensitive currencies such as the Canadian, Australian and New Zealand dollars, whose economies are heavily tied to commodity prices, he said.
“We’ve lost one of the inputs, so really it’s more of a reliance on risk-reversals” and price action, Rai said. “It gives you a good feel for which way the market is leaning.”
Other firms have also deployed different approaches. Based on internal models and available public data, Nomura estimated in a Jan. 15 note that U.S. fixed-income markets are trading long duration on Treasuries, which much of that demand coming from domestic accounts.
Still, some traders suggested that the lack of CFTC data doesn’t severely handicap the market. There hasn’t been a decline in volumes since the shutdown, and the dominance of U.S.-China trade talks may reduce the need to rely on positioning data, according to two currency traders based in London, who asked not to be identified because they aren’t authorized to speak publicly.
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