Morgan Stanley: USD Short Positioning Barely Changed

Morgan Stanley note that "in G10 FX, the largest short is in USD and the largest long is in EUR. FX options markets are most long EUR, and most short USD, NZD and AUD within the G10. Although the FOMC minutes disappointed dovish market expectations and eurozone PMIs were also weaker than expected, markets didn't scale back on their short USD positions in any significant amount, in line with the USD price action. Near-term USD/G10 shorts in the options market remained large, and sentiment improved slightly but remained very bearish. Investors holding on to their short USD positions may be a reflection of expectations for a dovish message from the Fed at the Jackson Hole symposium. Should the Fed disappoint expectations again, it could cause US real yields to reverse their decline and equities to fall, prompting a larger adjustment of USD short positioning. The Fed is more important than eurozone data: This is evident from changes in EUR positioning too. In the options market, EUR/USD longs were unchanged after Friday's eurozone PMI prints, and longs even increased on the week. Instead, options traders reduced their EUR/CHF longs slightly while keeping their small EUR/JPY longs unchanged. This suggests that the Fed is a more important driver of FX markets at the moment, even though there were more signs of EUR/USD selling in the futures market, with EUR bullish sentiment moderating to be more in line with the other G10 currencies, and CFTC futures traders selling EUR for the first time in six weeks going into the FOMC minutes."