Who is buying EURUSD?
Citi tries to answer that question. Are those systematic or discretionary traders? It’s indeed an interesting question.
As Micheal Bryant writes, discretionary trading compared to systematic trading, due to the direct involvement of humans, discretionary trading may be influenced by emotions, with no easy possibilities of backtesting and a limited risk control. Citi argues that the recent EUR/USD resilience is due to systematic traders are having an increased impact on price action, while macro traders have been sidelined waiting for the ECB/Draghi to be more definitive.
Citi adds that with macro’s sidelined waiting for the ECB, CTA’s & trend following traders have been having a greater influence. Citi clarifies that EURUSD momentum continues to tell CTA’s to keep covering EURUSD shorts. Hence, EURUSD price action keeps drifting higher. There is a limiting factor – the ECB, but without confirmation from Draghi concern is reaching critical levels, the beta driver in markets remains to the topside. Algorithmic traders follow momentum & continue to cover short positions, buying EUR. That’s the short run or beta flow in FX markets. Citi notes that alpha trading has been sidelined, but this is not forever. Until there is a change in the macro sphere and policy expectations, discretionary accounts will remain on hold and waiting to sell. The closer we get to 22 October, the greater the pressure to preposition ahead of ECB.
Citi believes that while this positioning dynamics point to upward pressure in EUR/USD in the short term, they are inclined to leave their directional call anchored to 1.10 at year-end on the expectation of changing macro environment and policy implications.