Looking at last week’s Commitment of Traders report, the only notable changes were relating to net positions in the Swiss franc, Canadian dollar and British pound. Changes in positioning were fairly limited for the US dollar, euro, gold and crude oil. Crude oil positions, based on 3-year trailing averages and net speculator positions as a proportion of total open interest, remain at a bullish extreme.
The purpose of this weekly report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we flag extended positioning as a risk. Crowded positions do not suggest an imminent reversal, but should be considered as a significant risk factor when investing in the same direction as the crowd. This is shown below:
CFTC COT speculator positions (futures & options combined) – February 20, 2018
Notable extremes, significant changes in weekly positions, and large net positions as a proportion of open interest are highlighted above. Extremes in net positions are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages. Weekly changes are highlighted when they are significant as a proportion of open interest. Finally, net positions as a proportion of outstanding interest are highlighted when they are large relative to historical averages.
The biggest changes this week include falling net positions in the Canadian dollar and the British pound, and rising net positions in the Swiss franc. Canadian dollar net positions are falling as the country grapples with tough NAFTA negotiations and issues with crude oil infrastructure. Recent problems with the Keystone pipeline have resulted in sharply lower prices for Western Canadian Select relative to West Texas Intermediate (the US benchmark price for crude oil). British pound net positions are falling as traders re-assess the likelihood of a Brexit trade deal. Finally, traders are trimming their short positions in the Swiss franc as the currency makes gains against the US dollar and the euro.
Canadian dollar weakness keeps the bulls at bay
Looking more deeply at the Canadian dollar, the currency has performed poorly this year. Thanks to slowing growth, transportation bottlenecks affecting its crude oil industry, and tough NAFTA negotiations, the Canadian dollar is running out of steam. The currency has weakened against all major peers including the US dollar, euro, and the Japanese yen. We have maintained a bearish outlook on the Canadian dollar against the euro since last November (bullish EUR/CAD), while we expect to downgrade our outlook on the Canadian dollar against the US dollar shortly. In mid-February, we downgraded our medium-term outlook on CAD/JPY to bearish. The Canadian dollar has continued to weaken against the yen since that time.
As the long Canadian dollar trade continues to lose money, traders are trimming their positions in Canadian dollar futures and options contracts. This is shown below:
Only mildly bullish
Looking at the chart above, one can see that enthusiasm for the Canadian dollar has been falling since last summer. After the Bank of Canada signaled monetary normalization last June, speculators flipped from net short to net long soon afterwards. Towards the end of 2017, net long positions fell after the BoC signaled its “cautious” outlook for inflation (indicating a slower pace of rate hikes).
As momentum falls, Canadian dollar less likely to keep strengthening
Following a jump in net long positions in the Canadian dollar a few weeks ago, we wrote that optimism for the currency may be returning. At the time, crude oil prices traded at multi-year highs while the US dollar kept selling off. The outlook from trade negotiations seemed fairly positive for Canada, as the US trade deficit with Mexico was the main target of NAFTA negotiations.
Today, the outlook is decidedly bleaker. Trade discussions have become increasingly contentious as United States Trade Representative Robert Lighthizer has indirectly criticized Canada for its stance on the automotive sector. Looking at crude oil, prices have fallen while the Canadian crude oil sector is suffering from infrastructure issues. Finally, recent economic data (such as retail sales figures) have disappointed, worsening the outlook for GDP growth and the prospect for more rate hikes this year. All in all, the outlook for CAD is decidedly less bullish today, and this is reflected in falling speculator enthusiasm for the currency.