This week’s Commitments of Traders Report includes quite a few meaningful changes in speculator positions in major currencies and commodities. In recent history, changes have been fairly insignificant. Specifically, net positions in the euro, the British pound and gold are all down this week. On the flip side, net positions are higher in commodity currencies such as the Australian dollar and the Canadian dollar. Speculators didn’t wait to sell the euro and the British pound ahead of last week’s European Central Bank meeting. Gold is also out of favor as the US dollar enters a bullish trend.
Looking at extremes in speculator positioning, net long positions in the Japanese yen are at a bullish extreme based on trailing 12-month averages. Net long positions in the British pound and crude oil are at a bullish extreme based on trailing 36-month averages. We have flagged the same three extremes over the past two weeks.
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) – April 24, 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
After many weeks of flagging long euro and long British pound positions as a risk, net positions in both currencies fell significantly last week. The most interesting fact is that speculators didn’t wait for the ECB’s press conference or for UK Q1 GDP growth figures. Following unchanged guidance from ECB President Draghi and weak UK GDP growth data, both currencies have sold off sharply this week. As a result, the US dollar is strengthening in relative terms and has recently entered a bullish trend. While long gold positions are only moderately bullish (far from the extremes seen in other commodities), speculators are growing wary of accelerating US growth and inflation. As the Federal Reserve is likely to signal more rate hikes given today’s economic environment, this is not a constructive environment for the precious metal.
Turning to commodity currencies, speculators are more bullish on the Australian dollar and the Canadian dollar this week. Unfortunately, the recent jump in investor optimism is not reflected in commodity currency performance. Both AUD and CAD have been selling off sharply for the past two weeks thanks to a rebounding US dollar. While commodity currencies look oversold in the short-term (meaning they are due for a relief rally), the longer term trend remains bearish.