FX traders badly positioned for sharp rate change expectations

Dec 4 – FX traders are badly positioned for the recent sharp change in expectations for US interest rates.

The possibility of further tightening and a strong belief that rates would remain elevated for a long time have been swiftly replaced by the probability of a cut as early as March next year.

Traders who are predominantly betting that the dollar will rise have had little time to change their positions, leaving a lot of these bullish bets exposed during a month when liquidity is apt to fall and potentially exacerbate the extent of any dollar drop.

Positioning data is masking the extent of the issue because other traders have added to bets on EUR/USD rising, a single position now almost as large as all the others combined.

Excluding bets on the euro, those placed on the dollar rising total around USD 23 billion, which is large enough when supported by fundamentals but probably unsustainable given the about turn on the interest rate outlook.

Bigger bets against JPY, INR, MYR, AUD, and CAD are the most vulnerable but with traders also betting against NZD, GBP, and CHF, and no sizeable bets against the USD versus any of the Asian currencies in Reuters FX poll, they have much to worry about.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own.)