Looking at this week’s Commitments of Traders Report, there are significant changes in the US dollar index, Japanese yen, British pound, Australian dollar and Swiss franc net speculator positions. For the past several weeks, speculators have been loading up on the US dollar while selling risk and inflation-sensitive assets. Japanese yen positions are down for the fifth week in a row, while gold positions are falling for the sixth week in a row. Even Swiss franc speculator positions, which are at a bearish extreme based on a range of different measures, fell for the third week in a row.
Looking at extremes in positioning, long US dollar (both the US dollar index and our implied measure of USD positioning) are at a bullish extreme based on trailing 12-month averages. Short euro, gold and Swiss franc positions are at a bearish extreme this week. Looking at net positions as a proportion of total open interest, the same currencies are all at extremes based on historical averages. The significant short position in the Swiss franc is particularly notable, given that the currency has been at a bearish extreme now for eleven weeks in a row.
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) – July 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
Ahead of last week’s European Central Bank meeting and US second quarter GDP growth data, speculators bought the US dollar. As a result, speculator positioning in the US dollar continues to increase, while negative or low-yielding assets (such as the Japanese yen or gold) remain out of favor. This is especially the case as the Federal Reserve is expected to keep signaling more rate hikes. The current net long position in gold (+32,331 contracts) is the lowest since December 2015. At the time, gold made a long-term bottom around $1,050/ounce following a painful four-year bear market. While the short position in the yen is not as extreme, the currency is also out of favor given its relatively limited yield.
Looking at other currencies, British pound net positions are down this week following both Brexit-related headwinds and recent weakness in inflation data. Following the EU’s rejection of key components of Theresa May’s Brexit trade proposal, the odds of a “hard Brexit” are rising. Looking at economic data, foreign exchange traders are currently pricing in an 80%+ chance of a rate hike next week despite a decelerating trend in UK inflation figures. Unsurprisingly, speculators are adding to their short bets against the pound.