Trend followers have recovered their positions on long EUR/USD trades: BofA

Bank of America analysis indicates Commodity Trading Advisors (CTAs) have re-established long EUR/USD positions, which, alongside GBP and MXN, remain 'stretched long' and vulnerable to potential corrections. The report also notes CTAs are 'moderately long' 10-year U.S. Treasury futures and are expected to increase short positions in JPY and CAD next week, reflecting a bearish outlook for those currencies.

Analysis

According to a Bank of America analysis, systematic trend-following investors, specifically Commodity Trading Advisors (CTAs), have maintained their long positions in the euro against the U.S. dollar following a recent rebound in the currency, which temporarily moved trigger points for unwinding these trades further away. However, positioning in the euro, as well as in the British pound and Mexican peso, is described as 'stretched long,' indicating these currencies are exposed to a heightened risk of correction due to crowded positioning. The report also signals a developing bearish sentiment for other major currencies, with CTAs expected to increase short positions in the Japanese yen and Canadian dollar in the upcoming week. In fixed income markets, CTAs hold 'moderately long' positions in 10-year U.S. Treasury futures, with these positions anticipated to move in tandem with spot market price action.

Key Decisions for Investors

• Investors with long exposure to EUR, GBP, and MXN should manage risk cautiously, as the 'stretched long' positioning of systematic funds makes these currencies vulnerable to a sharp correction.
• Consider monitoring the Japanese yen and Canadian dollar for developing downside momentum, as trend-following funds are reportedly poised to increase their short positions against these currencies.
• Note that systematic flows in 10-year U.S. Treasury futures are likely to reinforce existing price trends rather than act as a contrarian force, given the current 'moderately long' and reactive posture of CTAs.