Looking at this week’s Commitments of Traders Report, there are relatively few changes in net speculator positions across major currencies and commodities. The biggest change in positions can be seen in the Japanese yen, where speculators continue to flip-flop. As we wrote in last week’s edition of this report, traders remain undecided regarding the future direction of the yen.
Looking at extremes in speculator positioning, only short Swiss franc net positions are at an extreme (now for the sixth week in a row). This is based on the current net short position compared to trailing 36-month averages. For the first time in many weeks, speculators in the Swiss franc were paid for sticking to their bearish thesis. The Swiss franc fell sharply against the US dollar this week.
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 12, 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
Unsurprisingly, this week’s COT Report shows limited changes in speculator positioning. As we have written in the past, this is because central bank guidance tends to weigh heavily on trading decisions in to the foreign exchange speculator community. Ahead of the US Federal Reserve meeting, the European Central Bank meeting and the Bank of Japan meeting last week, few traders were looking to make significant adjustments in their portfolios. Following this week’s latest guidance, however, we expect to see more changes in next week’s COT Report.
Specifically, the market’s reaction to the ECB’s latest guidance was unanimous. While euro traders have been waiting for the ECB to significantly tighten monetary policy for a long time, Draghi disappointed the market once again. The reaction in the euro was swift. Pairs such as EUR/USD and EUR/JPY fell sharply following the ECB meeting.
Beyond immediate reactions in the euro, there is a risk that the current downturn can last much longer. This is because of big net long speculator positions in the euro, which are still elevated by historical standards.
Watch out below
As can be seen above, the recent drop in net speculator positions in the euro (after peaking at +150,000 futures and options contracts earlier this year), is relatively limited. Historically, speculators have adopted net short positions during significant downturns. As the outlook for the Eurozone darkens, the euro has room to fall much further.