Looking at this week’s Commitments of Traders Report, changes in speculator positioning are limited. For the fourth week in a row, speculators trimmed their net short position in the Swiss franc while adding to their short positions in the Japanese yen. While the two safe haven currencies typically move in the same direction, the Swiss franc has been strengthening in response to slowing European growth while the yen continues to trade as a function of rising bond yields.
Looking at extremes in positioning, there are no changes this week relative to last week. The long US dollar net position (based on the US dollar index contract) is at a bullish extreme looking at 12-month averages. Short Australian dollar and short gold remain at a bearish extreme based on 36-month averages. When the net speculator position is more than two standard deviations smaller or larger than the trailing 12-month or 36-month average, we flag the position as an extreme.
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) – October 2, 2018
Notable extremes, significant changes in weekly positions, and large net positions as a proportion of open interest are highlighted in gray 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
As US economic data suggests that both inflation and growth are accelerating simultaneously, US Treasury bond yields are rallying as a result. In particular, an ongoing acceleration in retail sales, industrial production and durable goods orders suggests that the US economy was resilient in the last quarter. As the Japanese yen is a low-yielding safe haven currency, the yen tends to rally in response to rising bond yields. Last week, US Treasury yields moved up sharply with 10-year Treasury yields breaking out to new highs for the year. 10-year Treasury yields ended the week at 3.24%.
Looking at USD/JPY, the pair came within striking distance of 115 last week. While 10-year Japanese government bond (JGB) yields have been rising alongside global bond yields, the Bank of Japan is unlikely to tolerate a significant move given the BoJ’s ‘yield curve control’ program. The yen’s move lower may be running out of steam as a result. Beyond monetary policy factors, the yen continues to look oversold based on our daily trading range calculations. We derive daily trading ranges based on 30-day trends in price, trading volumes and volatility. Trading ranges are updated daily in our Japanese yen daily update.