There are few notable changes in speculator positions according to the latest Commitments of Traders Report. The build-up in long US dollar positions has slowed this week, relative to the significant growth we saw in recent history. This being said, speculators continued to buy the US dollar this week while reducing their positions in all other major currencies (except the Swiss franc). The biggest change this week can be seen in British pound positions. For the last five weeks in a row, speculators have been selling the pound, and are now net short the currency to a more significant degree.
Looking at extremes in positioning, net positions in the US dollar index, euro, Canadian dollar and our implied measure of the US dollar are all at extremes based on trailing 12-month averages. Given the intensity and speed of the recent move up in the US dollar, long US dollar positions are looking stretched. The Swiss franc is at a bearish extreme based on trailing 36-month averages. Swiss franc net positions have been at a bearish extreme now for nine weeks in a row.
The purpose of this weekly report is to track how the speculator community 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) – July 10, 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
Following a rapid move up in the US dollar, the buck is currently taking a breather. This can also be seen in the euro, with the EUR/USD exchange rate currently hovering in a narrow channel between 1.15 and 1.18. This phenomenon can also be seen in US dollar net positions over the past few weeks. After speculators initially missed the big move up in the dollar, they flipped from net short to net long in early May. Since that time, the dollar has been trading sideways, and speculators have accordingly stopped buying the dollar at a rapid pace. This being said, both fundamental and quantitative factors support a stronger buck, and it is more likely that the US dollar will continue strengthening in the near future.
Turning to the British pound, speculators are increasingly bearish on the pound despite growing rate hike expectations and reasonably good economic data. While euro net positions remain positive (meaning speculators as a group remain long the euro), speculators are net short the British pound. This week, the number of contracts shorting the pound grew by more than 6,000, despite only small moves in the underlying currency. One possible explanation is that increasing domestic instability (following the resignation of David Davis and Boris Johnson) is causing speculators to hedge their British pound exposures using futures contracts.