This week’s CFTC data shows that speculators continue to be short the US dollar while staying long euros, Canadian dollars and Australian dollars. This is shown below:
CFTC COT (futures & options combined) - September 26, 2017
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical 1-year and 3-year trends. Previous extremes continue in the US dollar, euro, Australian dollar and Canadian dollar. This week’s interesting addition is the British pound – speculators are now long the pound having been short the currency since November 2015.
Following recent indications from the Bank of England, which stated that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”, speculators have responded by buying pounds.
Sell GBP/USD at 1.25 and buy at 1.35?
Looking at recent speculator positioning in the pound has been instructive when searching for turning points. Speculator net positions and 1-year z-scores since 2014 are shown below:
Pound in historically bullish territory
Despite being only 2,218 contracts net long, speculators in the British pound are in historically bullish territory. Today’s positioning is more than two standard deviations above the 1-year average.
Looking at the chart above, investors were historically bearish on the pound back in March. On March 21, 2017, speculators were net short 113,271 contracts, representing a 1-year z-score of -2.3x. At the time, GBP/USD was trading around 1.24. The exchange rate has since climbed to above 1.30 and was trading around 1.34 on September 26 (when the last CFTC COT report was published). Thus the consensus shorted the pound near its bottom while buying the currency after it strengthened substantially.
An imminent reversal?
The pound enjoyed a strong rally in early September, following the BoE’s and Carney’s comments, which initially led to our bullish outlook on the currency. Since then, the pound has moved into overbought territory (looking at various technical indicators), and now speculator positioning looks stretched as well.
While neither suggest that a reversal is certain, both are flashing warning signs for the currency. Our view is that the pound bull market that has been intact since early September is likely nearing its end. As such, we’d suggest caution despite the consensus’ newfound love of the pound.