Looking at this week’s Commitments of Traders Report, there are very few notable changes in speculator positioning. The biggest change can be seen in Swiss franc net positions. After the franc entered a bullish trend (a topic we covered last week), net short positions in the currency are down significantly this week.
Short euro, short Swiss franc and long US dollar (based on our implied measure of USD positioning) are no longer at extremes this week. Long US dollar index, short gold and short British pound remain at extremes. 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 4, 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
Looking at broad changes in this week’s COT Report, the ‘buy US dollar’ trade is taking a breather. Notably, speculators are once again net long the euro this week, while net short positions in the British pound and the Swiss franc are being reduced. In general, speculator positioning tends to lag price action by a few weeks. As the US dollar has been weakening after its most recent peak in mid-August, speculators are reducing their bets on the dollar accordingly.
After 16 weeks, Swiss franc net positions are no longer at a bearish extreme (two standard deviations below historical averages). While speculators reduced their net short position on the currency by just 4,567 contracts this week, note that the total open interest is just 82,117 futures and options contracts. As a result, the change in positioning is fairly meaningful.
As growth in Europe continues to slow in rate-of-change terms, the Swiss franc is strengthening accordingly. Historically, the franc has served as a safe haven currency from troubles in Europe, given its tendency to strengthen in response to European downturns. While EUR/CHF has been selling off sharply since last May, USD/CHF is also starting to look fairly week. Last week, USD/CHF entered a bearish trend (based on our quantitative trending indicator) and is more likely to move lower for the foreseeable future.