Looking at the latest Commitments of Traders report, bullish extremes continue in long crude oil, the euro and the British pound. Traders have increased their long bets on the euro and crude oil, while taking profits on the pound.
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) – January 30, 2018
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages.
The biggest changes in net positions (as a proportion of open interest) this week include rising Canadian dollar and Japanese yen positions and falling US dollar index positions. Thanks to a recent improvement in Canadian economic data, traders have increased their net long positions. Looking at the Japanese yen, traders have added to long positions as some believe the Bank of Japan is looking to adjust the yield curve control program. In a longer commentary on the current position of Japanese yen, we argued that the BoJ is unlikely to signal tighter monetary policy in the near term. Lastly, speculators have trimmed long positions in the US dollar index. As ex-US growth (particularly in the Eurozone) remains strong, there are few reasons to be buying US dollars today.
Canadian dollar speculators only mildly positive on the loonie
Looking more deeply at the Canadian dollar, speculators remain cautious towards the currency. (We detailed concerns about the Canadian dollar - in November.) Net long positions in futures and options do not look extreme based on z-scores (1-year z-score = 0.5x) or as a proportion of the total open interest (17.1%). We typically consider the currency to be at an extreme when it is either two standard deviations above historical trailing averages (that is, when z-scores are greater than 2) or when the net position as a proportion of the total is 35% or greater. With limited resistance from speculator positioning, the Canadian dollar can continue pushing higher. Historical net positions and associated 1-year z-scores are shown below from reference:
Not much optimism for CAD today
As can be seen above, the Canadian dollar was at bullish extremes in late February 2017 and at bearish extremes in early 2017. After depreciating between February and May, the Canadian dollar rose sharply during the summer. The currency strengthened thanks to both a weaker US dollar, and expectations for higher interest rates. After peaking in September 2017, the Canadian dollar was ultimately weighed down by NAFTA-related fears and a change in stance from the Bank of Canada. Specifically, the BoC turned “cautious” in its inflation outlook towards the end of 2017. In December 2017, we predicted that the Bank of Canada was unlikely to hike rates at its upcoming meeting. Instead, the BoC hiked rates in January 2018 following better inflation data, while signaling its concerns relating to NAFTA discussions.
Monetary policy expectations are heating up, but will the Canadian dollar recover?
In recent history, Canadian economic data has been surprisingly good. The latest inflation figures show year-over-year headline inflation at 1.9%, not far from the Bank of Canada’s 2% target. Month-over-month GDP growth for November 2017 registered at 0.4%, right in line with consensus expectations. While Canadian economic growth is no longer accelerating at a frenetic pace (year-over-year growth peaked at 4.7% in May 2017), the numbers are good enough for the BoC to consider raising interest rates - which, in turn, will impact the Canadian dollar future forecast.
While the data has provided a welcome boost for the Canadian loonie, fears regarding ongoing NAFTA negotiations remain a drag on the currency. As such, net long positions in the currency remain fairly limited. Considering strength in crude oil, good economic data, strong US growth (Canada’s largest destination for exports) and weakness in the US dollar, the Canadian dollar bull market has been fairly weak. If and when trade negotiations conclude with a positive outcome, expect the Canadian dollar to rally accordingly.
View the daily Canadian dollar update, live chart and additional analysis on the currency.
View the EUR CAD Live Chart and additional analysis on this currency pair.