BNY strategist Geoff Yu says EUR positioning has shifted from a pre-conflict “hedge the Dollar” trade to being net underheld. He adds that, if a ceasefire holds over the next two weeks, foreign exchange flows may revert towards averages after “extreme” moves since the conflict began.
He describes outflows from emerging market currencies under balance of payments pressure and developed market currencies linked to stagflation. He contrasts this with support for energy- and commodity-linked currencies where policy tightening is more feasible.
Yu contrasts the Eurozone, where energy costs are feeding stagflation worries, with Norway, where he expects a strongly positive terms-of-trade shock. He notes Norges Bank has largely pre-committed to a hike and describes it as the only developed central bank in Europe to do so.
He says the unwind of the prior “hedge the dollar” theme is now complete, leaving the euro net underheld on an aggregate basis. He attributes this to reduced forward EUR buying for hedging, despite rate expectations moving in a direction that would usually encourage more hedging.
For Norway, he says NOK strength could pause if energy prices peak. He adds that if receipts cover government financing needs, Norges Bank may resume FX purchases, while NOK holdings remain the strongest among European currencies.
We are seeing a familiar pattern where the Euro is net underheld, similar to the period after the conflict began in 2022. Renewed concerns about Eurozone stagflation have made the currency highly sensitive to any good news. This extensive negative positioning means the threshold for a sharp upward reversal is now significantly lower.
The latest data supports this view, with Eurozone Q1 2026 GDP coming in at a sluggish 0.2% even as March inflation cooled to just 2.1%. In response, the European Central Bank cut its key rate to 3.75% last month, widening the policy gap with the US. Data from the most recent Commitment of Traders report shows speculative net short positions on the Euro are at their highest level in over a year.
At the other end, the Norwegian Krone has been a beneficiary of persistently high energy prices, with Brent crude holding above $95 per barrel. This has allowed Norges Bank to maintain a hawkish stance with an interest rate of 4.75%, attracting significant capital inflows. The NOK remains one of the most crowded long positions in the G10 currency space.
However, we believe the NOK’s run may be losing steam as these long holdings appear stretched. If energy prices show any sign of peaking, or if government oil receipts become large enough for Norges Bank to resume selling Krone for its foreign currency reserves, the rally could stall. This creates a clear risk for those holding long NOK positions.
For derivative traders, this setup suggests that out-of-the-money call options on the EUR/USD are attractively priced for a potential snap-back rally. Given how underheld the Euro is, any positive catalyst could trigger a rapid unwinding of short positions. The low cost of these options provides an asymmetric bet on improving European sentiment.
Conversely, it may be prudent to hedge long NOK exposure or consider buying puts on the currency. The crowded positioning makes it vulnerable to a sharp correction on any negative news for the energy sector. This offers a way to protect gains from the recent rally while staying positioned for further, albeit slowing, upside.
