Changes in positions are relatively limited in this week’s Commitments of Traders Report. The biggest changes in speculator net positions can be seen in the Japanese yen and the Swiss franc. Speculators have reduced their net short positions in both currencies this week. Changes in other major currencies and commodities are fairly limited.
Looking at extremes in speculator positioning, the Swiss franc remains at a bearish extreme for the fifth week in a row. This is based on the current net short position compared to trailing 12-month and 36-month averages. While the currency has continued to strengthen against the US dollar and the euro, CHF speculators remain stubbornly short the currency. As a safe haven, the franc tends to rally when European growth is decelerating.
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) – June 5, 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
Last week, we wrote that central bank guidance tends to weigh heavily on consensus speculator positioning. This is particularly the case for the Swiss franc and the Japanese yen, as both respective central banks remain firmly committed to negative interest rates and loose monetary policy. All else held equal, negative-yielding currencies tend to weaken against higher yielding currencies. At the same time, global growth (particularly in the Eurozone and emerging markets) continues to decelerate. As both the yen and the franc are safe haven currencies, they tend to strengthen during downturns. As a result of this dynamic, trading in safe haven currencies resembles a tug of war. For now, traders continue to flip-flop between fears of rising bond yields (which tend to weigh on negative-yielding currencies) and fears of a significant global downturn.
Turning to commodities, crude oil is also at a crossroads. Following the recent sell-off that began last month we have downgraded our outlook on crude oil to neutral. Beyond weaker prices, the recent downturn was accompanied by rising trading volumes. This is a sign that traders are increasingly bearish on the commodity, putting the bullish trend at risk. This week, net long positions in crude oil (WTI) continued to fall. For now, traders continue to await further supply guidance from OPEC. Similar to the dynamic seen in currency trading, forward guidance from the world’s most significant oil cartel has a deep influence on speculator positioning. Should OPEC disappoint market expectations, crude oil has plenty of room to continue strengthening.