Looking at this week’s Commitments of Traders Report, there are few notable changes in speculator positioning. The only move worth highlighting can be seen in Swiss franc net positions. For the second week in a row, speculators cut back on their short franc positions. As we wrote two weeks ago, the Swiss franc entered a bullish trend against the US dollar and is likely to keep strengthening for the foreseeable future.
Looking at extremes in positioning, short British pound is no longer at a bearish extreme this week. Long US dollar (based on the US dollar index contract) remains at a bullish extreme based on 12-month moving averages. Short gold remains at a bearish extreme based on 12-month and 36-month moving 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) – September 11, 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
After peaking in mid-August, the US dollar has been running out of steam in recent history. In response to a weakening dollar, ‘risk on’ currencies such as the euro have been rebounding. Looking at euro net positions, speculators flipped to net long two weeks ago and added to their long positions again last week. Despite recent optimism for the common currency, our quantitative trending indicator continues to suggest a bearish outlook for EUR/USD. Looking at underlying trends, price-based momentum remains bearish. As sell-offs in the currency continue to be accompanied by above-average trading volumes, volume-based indicators also suggest a bearish trend.
Turning to the Swiss franc, speculators once again significantly curtailed their net short position in the currency this week. While USD/CHF ended the week flat, the trend underlying the Swiss is now more clearly in a bullish formation. As trend-following speculators reduce their short positions, the net short position in the Swiss franc is falling accordingly.