There are a very significant number of changes in this week’s Commitments of Traders Report. The biggest change can be seen in speculator net positions in the US dollar. As the world’s benchmark currency, the big move in the dollar is influencing other major currencies and commodities. As a result, there are significant changes in net positions in the euro, Japanese yen, British pound, Australian dollar, Swiss franc, and gold this week. In last week’s report, we highlighted the significant number of net long positions in the euro. This is a warning sign, and raises the risk that the euro can fall much further. This week, the number of speculator net long positions in the euro has fallen sharply.
Looking at extremes in positioning, the US dollar (both the US dollar index and our implied measure of US dollar positioning) is currently at a bullish extreme. Meanwhile, the euro and the Australian dollar are at a bearish extreme. This is based on the current net position compared to 12-month trailing averages. The Swiss franc is also at a bearish extreme (based on 36-month trailing averages), and remains at an extreme for the seventh week in a row.
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 19, 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 the buck surged above the top end of our daily trading range for a few days in a row, the US dollar was in overbought territory based on our quantitative indicators. The latest figures from the COT Report confirm our view. 1-year z-scores for the US dollar index (+4.3x) and our implied measure of US dollar positioning (+2.7x) both point to an excessive build-up in net long positions. After making its latest high at 95.53, the US dollar index ended the day at 94.52 last Friday. As a result, the US dollar is no longer looking overbought.
In typical fashion, speculators were stubbornly short the US dollar despite a clear bullish trend that was established in late April. US dollar futures and options net positions have only been meaningfully net long for one week. Once buying the dollar became a consensus trading idea in the speculator community, the buck moved into overbought territory and sold off.
The good news for dollar longs is that the currency is likely to keep strengthening. As US growth continues to outperform all other major economies, the outlook for the buck remains positive. With only 18,173 contracts net long the US dollar index, there is also plenty of room for the dollar to move up.
While the euro ended last week higher, the longer term trend is bearish and long positions in the currency remain positive. Looking at positioning in the euro over history, euro speculators have adopted big net short positions in the currency during economic downturns. Despite decelerating Eurozone growth (in year-over-year terms, Eurozone growth peaked in Q4 2017), euro speculators remain net long. This suggests that the euro has room to fall much further.