The extremes in this week’s CFTC data are in long euro, British pound and Canadian dollar positions and in short US dollar positions. This is shown below:
CFTC COT (futures & options combined) – October 3, 2017
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical trailing 1-year and 3-year trends. As speculators reduced their long Australian dollar positions this week (73.3k long this week vs. 78.0k last week), long AUD positions are now below extreme levels. Previous extremes continue in the US dollar, euro, Canadian dollar and British pound.
Last week we warned that long British pound positions seemed stretched. At the time, GBP/USD was trading above 1.34. Despite a tough week for the pound (GBP/USD is now down to around 1.3060), speculators have increased their long GBP positions. We also previously noted that there are few reasons to be a pound bull today, given the weight of politics, Brexit and economic weakness working against the currency. Given elevated speculator positioning, the pound continues to be vulnerable despite this week’s sell-off.
Can CAD sentiment stay elevated despite a falling loonie?
Similar to the pound, Canadian dollar speculative positioning is also elevated thanks to hope for ‘normalizing’ interest rates. Yet, the currency faces headwinds of slowing growth (in rate-of-change terms), elevated sentiment and a central bank that has adopted a “cautious” tone towards future rate hikes. Historical CFTC net positions and trailing 1-year z-scores are shown below:
CAD bulls stay long
With 78,001 contracts long, this week CAD bulls have increased their long positions by 1,840 contracts. This is despite the fact that USD/CAD is now strengthening, having rebounded strongly above 1.20/1.21.
Looking at the chart above, speculators had record net short positions against the Canadian dollar last May. On May 16 (when speculators were three and a half times more short than the trailing 1-year average), USD/CAD traded above 1.36. Since that date the loonie has strengthened substantially, causing speculators to flip from being record short to record long the currency. As a group, speculators have demonstrated herd behavior and have been slow at adjusting to changing trends.
While elevated sentiment alone is not sufficient in predicting reversals, CAD bulls should proceed with caution. Beyond sentiment, the outlook for Canadian growth for the rest of 2017 and 2018 is weak, and the Bank of Canada has a history of surprising markets. The Canadian dollar bull market that started last June may be nearing its end.