In this week’s Commitments of Trader’s Report, speculators continue to sell assets inversely correlated to the US dollar. The biggest changes can be seen in falling speculator net positions in the Australian dollar, the Swiss franc, and gold. Net positions in other assets inversely correlated to the dollar including the euro, the British pound, the Canadian dollar and crude oil are also lower this week. The notable exception to this trend is the jump in net long speculator positions in the Japanese yen. While our trending indicator continues to suggest a bearish trend for the yen, speculators are increasingly bullish on the currency’s prospects.
Looking at extremes in speculator positioning, only the Swiss franc is currently at a bearish extreme based on trailing 12-month and 36-month averages. Remarkably, speculators have added to their net short positions in CHF this week. With almost 37,000 futures and options contracts net short, this week’s short position is one of the largest in many years. Given the Swiss franc’s tendency to serve as a safe haven from problems in the Eurozone, speculators are likely to have piled into the “short CHF” trade at the wrong time. This is particularly the cause thanks to rising political risks emerging from Italy’s new government.
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 15, 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
Thanks to a benign backdrop, the US dollar continues to strengthen. Beyond high growth and accelerating inflation, the buck is being helped by the relative outperformance of the US economy. Forward-looking indicators point to a continued deterioration in Europe’s fortunes, while turmoil in emerging market foreign currencies (such as the Argentine peso and the Turkish lira) is an additional cause for concern. On the other hand, recent economic data from the US, such as last week’s April retail sales figures, continues to suggest relatively high economic growth. Unsurprisingly, speculators are selling currencies inversely correlated to the dollar.
As we wrote in a recent analysis on gold, our view is that the problem of a global dollar shortage is likely to become more acute. Beyond the issue of decelerating growth outside the United States, balance sheets in emerging markets are particularly fragile. While Fed Chair Powell suggested that emerging markets are well positioned to stomach further rate hikes, in reality, most borrowers had assumed that easy financial conditions would continue for some time. Approximately one-third of all cross-border USD loans are owed by borrowers in emerging markets. As global growth continues to decelerate, the dollar has a lot of room to keep rising.