Looking at this week’s Commitments of Traders Report, speculators remain long currencies that are depreciating against the US dollar. This is particularly true for euro speculators. The biggest changes in speculator positions this week can be seen in the US dollar index and the Japanese yen. While net positions in the yen flipped to positive last week, they are once again negative this week.
Looking at extremes in speculator positioning, only the Swiss franc remains at a bearish extreme based on trailing 12-month and 36-month averages. While both USD/CHF and EUR/CHF fell last week (that is, the Swiss franc strengthened), speculators added to their net short positions. In typical fashion, speculators bought into the crowded “short CHF” trade just as the trend neared exhaustion. Thanks to an ongoing slowdown across the Eurozone, the Swiss franc is strengthening thanks to its safe haven qualities.
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 22, 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
Looking at this week at a high level, speculators lost money in the euro, British pound, Japanese yen, Australian dollar and crude oil. On the other hand, they were positioned correctly for moves in the Canadian dollar and gold. Despite a significant decline in EUR/USD, net long positions in euro futures and options contracts remain large (at almost 92,000) and above trailing 12-month and 36-month averages.
For now, euro speculators continue to buy the European Central Bank’s forward guidance. Despite an increasingly obvious economic slowdown, speculators remain optimistic that the ECB will end quantitative easing in the second half of this year and raise rates. The pattern in the euro is closely following what we saw previously with the British pound. Pound speculators held on to their net long positions despite a significant deterioration in the economic outlook. Once Governor Mark Carney downplayed the suggestion of a rate hike in May, speculators exited their net long position en masse. Given our bearish view on Eurozone growth this year, the same fate is increasingly likely for bullish euro speculators.