23 AUG 2013 01:01 EDT
By eFXnews.com
Focus of the day:
"The euro’s recent strength is driven by real money flows and the unwind of EM positions. As highlighted in our Flow Report, last week hedge funds were selling EUR, but non-leveraged accounts (real money) were large buyers. On a directional basis, the real money flows are larger than the three remaining client types. We have seen such a pattern before, in early 2013 and most recently in June 2013. In both instances, when EM Asian FX weakened, EUR-USD rallied – breaking its long standing correlation. Eventually the USD correlation returned - 12 days the first time and four weeks the second. The lower the EZ tail risk is – the more likely it is seen as an alternative region of growth to the US. The better European economic outlook is encouraged investor flow to diversify and undervalued European equities are still an attractive magnet. Real Money’s long EM position still remains the largest exposure that client type has, and Citi FX flows have only just begun to capture net outflows from the LatAm, EMEA and Asian regions. Real money flows tend to be sticky and make calling a reversal difficult. However, if the EUR flow is predicated on better growth and economic outlook, it should be highly sensitive to data surprises."
Richard Cochinos, Citibank.
"The euro’s recent strength is driven by real money flows and the unwind of EM positions. As highlighted in our Flow Report, last week hedge funds were selling EUR, but non-leveraged accounts (real money) were large buyers. On a directional basis, the real money flows are larger than the three remaining client types. We have seen such a pattern before, in early 2013 and most recently in June 2013. In both instances, when EM Asian FX weakened, EUR-USD rallied – breaking its long standing correlation. Eventually the USD correlation returned - 12 days the first time and four weeks the second. The lower the EZ tail risk is – the more likely it is seen as an alternative region of growth to the US. The better European economic outlook is encouraged investor flow to diversify and undervalued European equities are still an attractive magnet. Real Money’s long EM position still remains the largest exposure that client type has, and Citi FX flows have only just begun to capture net outflows from the LatAm, EMEA and Asian regions. Real money flows tend to be sticky and make calling a reversal difficult. However, if the EUR flow is predicated on better growth and economic outlook, it should be highly sensitive to data surprises."
Richard Cochinos, Citibank.
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