Long positions in the euro against the dollar are preferred by speculators in the markets – which seems strange given the differences in real interest rates. On the other hand, the short position in the euro against sterling is more in line with the interest rate outlook. Overall, speculators look unmoved on the greenback, according to the “Commitment of Traders” report. But this implies opening a long position in emerging market currencies against the dollar and a short position in developed market currencies.
That’s pretty much been the case over the last year – although the short option for developed markets is questionable, with a net long position in the dollar instead of developed market currencies, which is more “silent” than short positions in the dollar instead of emerging market currencies.
So far so good – positioning is largely in line with real interest rate differentials. But there are some anomalies in the aggregated positions. The most notable is the one in the euro. The total net shorting in DM currencies covers the long position in sterling and the euro.
Both the UK and Europe have lower real interest rate differentials than the US, given that the BOE is expected to cut more interest rates than the Fed in 2024. However, the real interest rate Europe’s policy rate is expected to be lower than that of the US at the end of this year.
Thus, the long position in the euro is not related to real interest rate differentials. This is also inconsistent with the EURGBP placement, which appears to be in line with the differences.
As the chart above shows, speculators are quite short the euro versus sterling over the past two years.
Real interest rates are lower in Europe compared to the UK and if we use CPI fixing swaps, the real interest rate in Europe is expected to fall by ~65bps. in 2024, against an increase of ~25 m.p. in the UK.
Euro-to-sterling shorts appear to be reflecting the interest rate trajectory, while euro-to-dollar longs may run into headwinds this year.
