Hedge funds and other speculators trading US futures markets are net buyers of the Brazilian real for the first time since March, according to the latest figures from the Commodity Futures Trading Commission. Figures released on Friday show that speculative accounts on the CFTC held a net long position of 2,365 Brazilian real contracts for the week ending July 16, the first net long position since late March and the most bullish on the currency since early March.
To be long a currency or financial asset is essentially to buy it, reflecting a bullish view and belief that it will rise in price. This snapped 16 consecutive weeks of being net short the real, which culminated in a net short position of 30,679 contracts in early June, the biggest net short and most bearish position since December 2014. Funds' flip to a net long position reflects the feel-good factor across Brazilian markets following political progress on pension reform, the government's landmark proposal to fix the public finances, save the Treasury around 1 trillion reais ($267 billion) over the next 10 years and revive economic growth.
This optimism and unwinding of bearish bets has propelled a 10% rally in the currency to below 3.72 per dollar in the last few days from over 4.10 per dollar on May 20. The CFTC data chimed with analysis from Morgan Stanley, which shows that "close to 100% of investors" now hold an overweight position in the Brazilian real relative to their benchmark. But the size of "overweight" is close to the historical peak, Morgan Stanley warned.
"Heavy positioning shouldn't be a catalyst for a sell-off, but it makes these markets more vulnerable to any negative news," Morgan Stanley's emerging markets team wrote in a recent note. Extreme positioning is often an indicator that a price reversal is in the cards. In this case, this would suggest the real's recent rally may run out of steam and the currency will start to weaken again.