In this week’s Commitments of Traders Report, speculators continue to sell positions inversely correlated to the US dollar. As a proportion of total interest, the most meaningful declines this week were in Swiss franc, British pound, and gold net positions. Other assets such as the euro, Canadian dollar, Australian dollar and crude oil also suffered from falling net speculator positions. As a result, the implied positioning in the US dollar rose by 2.7% this week. While speculators maintain a sizeable net short position in the US dollar, the “short USD” trade is suffering as the buck stages a comeback.
Looking at extremes in speculator positioning, net long positions in the Japanese yen are at a bullish extreme based on trailing 12-month averages. Net long positions in crude oil are also at a bullish extreme based on trailing 36-month averages. Long British pound is no longer at an extreme.
The purpose of this weekly report is to track how the consensus is positioned across various major 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) – May 1, 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. 1-year and 3-year z-scores are visually represented below:
1-year and 3-year z-scores based on net speculator positions
In last week’s edition of this report, we warned that the US dollar had entered a bullish trend, meaning more gains lay in store for the currency. This week, the USD is looking overbought in the short-term, and the currency is likely to give up recent gains over the coming days. That being said, the overall trend remains bullish and the dollar can keep strengthening over the longer term. This is especially true this quarter, as both US growth and inflation are accelerating simultaneously. Thanks to both good growth figures and late-cycle inflation, the Federal Reserve is unlikely to hesitate when raising interest rates. This stands in stark contrast with other global central banks, such as the European Central Bank, who are grappling with weak growth data. Unsurprisingly, net speculator positions in the euro, British pound, crude oil and gold fell for the second time in a row.
As we explained in a recent commentary on the US dollar, the currency can keep strengthening thanks to (1) slowing GDP growth outside the US, (2) diverging expectations for monetary policy, (3) significant short positioning in the currency, and (4) China’s struggles with its soft USD peg. As growth in most countries remains at an elevated level, recent gains in the dollar have been fairly modest. In the near future, the outlook for global growth is worsening because of weakening forward-looking economic data (such as sentiment figures). Once global growth slows down more sharply, hurting risk sentiment, expect even greater gains in the dollar.