British pound is at oversold levels, hinting an impending short squeeze when the oversold positions are squeezed out. This is one of the conclusions that are drawn by BAML‘s macro monitor. BofA clients have been selling British pound positions and as British pound rallies against the USD, stakes in GBP will be reclaimed by hedge funds. Research concludes that this would be a good time to enter the GBP trade as outflows reverse. BAML also notes that so far the short bets on GBP/USD have been losing as the GBP/USD pair has been trading on higher levels than before. Commodity traders had built a $5.3 billion short position in GBP/USD, out of which $1.2 billion has been covered while $4.1 billion remains at risk.
On the Japan front, after JPY fell to new lows and Japan focused hedge funds had turned big profits, activity is slowing down a little. BAML’s clients have either repurchased their shorts or are staying put, and real money clients are buying JPY while with BAML’s foreign clients JPY selling is on the wane. BAML also noted that subscriptions in investment trusts have picked up which is an indicator of household confidence. Japanese traders themselves are stepping up Forex trades, especially buying of EUR, and USD has increased.
In the bonds market, exposure in emerging market bonds has increased. In just the past week the industry took $1.1 billion in inflows, raising the total to $4.2 billion inflows. The local debt of EMs seems to be the preferred investment choice of hedge funds when compared with equities which have taken $3.8 billion in outflows. Inflows in the EM debt market continues to give support to EM currencies and is now the major driver of growth in EM Forex instead of equities. Different investor biases that were noted by BAML’s research included a preference for CNY bonds in Asia, while those who wanted to add diversity tilted towards KRW and IDR. In Latin America, investors were inclined towards MXN whereas COP was preferred for its diversity.
In developed economies, interest has particularly spiked in UK bonds which is now among the top three in fixed income flows in G10 countries. BAML however does not expect the positive sentiments for UK’s debt to translate to a bullish trend in GBP.