Looking at this week’s Commitments of Traders Report, speculators continue to decrease their bets in currencies and commodities inversely correlated to the US dollar. The biggest changes in positions this week can be seen in the Swiss franc, Japanese yen, Canadian dollar and gold. Speculators dumped safe havens (including the franc and the yen), while adding to positions in gold and the Canadian dollar.
Looking at extremes in speculator positioning, only the Swiss franc is currently at an extreme based on trailing 12-month and 36-month averages. Remarkably, speculators continue to add to their net short positions in the Swiss franc in spite of recent strength in the currency. Both EUR/CHF and USD/CHF continue to fall, while the outlook for the Eurozone continues to deteriorate. As a European safe haven currency, the franc typically strengthens in response to decelerating growth across Europe.
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 29, 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
Foreign exchange speculators tend to rely heavily on central bank forward guidance when making investment decisions. As a result, both the Swiss franc and the Japanese yen remain out of favor today. Shorting the Swiss franc is a particularly popular trade given that the SNB is seen as one of the most dovish central banks in the world. In a similar vein, the yen is also out of favor as the Bank of Japan is expected to main its “easy money” policies. In an environment of supportive risk sentiment combined with accelerating inflation, speculators are shorting negative-yielding currencies.
Turning to the Canadian dollar, speculators added to long positions in the Canadian dollar ahead of the Bank of Canada’s interest rate decision last week. In this case, they bet correctly as the BoC provided relatively upbeat forward guidance. While we maintain a bearish outlook on the Canadian dollar (particularly against the US dollar), next week’s COT report is likely to show increasing long positions in the currency as rate hike expectations accelerate.
Lastly, speculators added to net long positions in gold this week. Recent political tensions in Italy and Spain were the most likely drivers of this move. While net long positions in gold are up this week, we maintain a bearish outlook on gold as both the US dollar and US bond yields remain in a bullish trend. As gold trades inversely to real rates and is primarily traded against the dollar, the overall trend is bearish.