Citi: CitiFX Global Flows: Leveraged accounts are positioned, RM follow-through needed or FX reversal

From the FXWW Chatroom – Global Overview 
This week marks the fourth week in Citi’s data we’ve captured strong EUR selling and USD buying. As the chart of the week suggests – most of the USD buying (and selling elsewhere) has been driven by leveraged & hedge fund accounts. These G10 positions are now stretched & sensitive. To prevent a short squeeze, follow thorough from Real Money is absolutely needed this week. So far, such a flow has been missing in our data, with net USD buying near zero the past two weeks and accounts buying EUR. 
We focus on three main flows this week (page 2): 
1. EURUSD – further downside cannot be driven by hedge funds alone. Real Money accounts need to follow through, but so far have been reluctant (page 14). Positioning suggests RM has room to sell – so we continue to expect further EURUSD weakness. 
2. GBP positions reduced by 35% post BOE. GBP selling by leveraged accounts have removed about 35% of the cumulative sterling bought this year. In the short term, that’s a lot – but the market still remains long GBP (page 16). 
3. Greater EM weakness is one flow all investors (Hedge fund and Real Money) agree on. Post October’s risk rally, the flows are again turning negative (page 23). Further downside is possible and likely with RM positioning at odds with Asia data & Fed hikes. Citi: ECB set to cut, and cut big 
Reuters, in an exclusive report, is claiming that “a consensus is forming at the European Central Bank to take the interest rate it charges banks to park money deeper into negative territory in December”. The article cites no fewer than four anonymous members of the ECB’s governing council. It is hoped that this move will weaken the EUR even further and blow some life into limp inflation. 
It sounds as though it might be a fairly sizeable cut too: “Three of the ECB policymakers said debate is now about the size of the rate cut with some arguing that a 0.1 percent reduction, already priced in by markets, would have little impact. […] Another Governing Council member also argued for a bigger deposit rate cut, saying it could go from -0.20 percent to -0.50 percent or even -0.70 percent after the Danish and Swiss examples.” 
Why are they not simply looking to extend the QE programme? “A simple extension of the asset buying program would have a limited impact and it is complicated to add new assets to the plan as each asset class has particular set of issues, one policymaker said.” 
EURUSD has dropped lower, coinciding with the article’s publication, to 1.0746. 

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