Looking at this week’s Commitments of Traders Report, the biggest change in speculator positions can be seen in the Canadian dollar and the Australian dollar. Following several weeks of rising net positions in the US dollar (a sign that the investor community is increasingly bullish on the currency), changes were relatively limited this week. In the short-term, the US dollar’s ongoing ascent appears to be taking a breather.
Looking at extremes in positioning, long US dollar (both the USD index and our implied measure of USD positioning) is at a bullish extreme based on 12-month trailing averages. Short euro and gold positions are currently at bearish extremes based on 12-month trailing averages. Following a rapid appreciation in the dollar (and a significant sell-off in the euro and in gold), speculator positioning has been adjusting accordingly. Finally, the Swiss franc remains at a bearish extreme based on 36-month trailing averages. Swiss franc net positions have been two standard deviations smaller than historical averages now for twelve 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 31, 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
While commodity currencies such as the Australian dollar and the Canadian dollar tend to move in the same direction, the two currencies have been diverging in recent history. Thanks to Australia’s close trading relationship with China and trading restrictions in the Chinese yuan, the Australian dollar is often used as a liquid proxy for traders betting on Chinese growth. Between rising US-China trade tensions and slowing Chinese growth, speculators are increasingly bearish on the country’s growth outlook and the Australian dollar by extension.
On the other hand, Canadian dollar bears are fleeing thanks to a recent rebound in economic data and hopes for a positive outcome from ongoing NAFTA negotiations. A range of factors have been helping the Canadian economy this year including rising crude oil prices and accelerating US growth (Canada’s largest trade partner). Looking at the data, Canadian GDP growth has turned a corner and is now accelerating in rate-of-change terms. While trade-related concerns have weighed on the currency, hopes for a deal are rising following recent US-Mexico discussions. Earlier this week, Mexico’s Economy Minister Ildefonso Guajardo said that there were “very good” odds that the two sides would resolve key NAFTA contentions. Following recent strength in the currency, we have upgraded our outlook for the Canadian dollar to neutral accordingly.