Looking at this week’s Commitments of Traders report, bullish extremes continue in the euro, British pound and crude oil. Looking at net speculator positions as a proportion of open interest, long crude oil positions are the most at risk. While euro and British pound net positions are elevated relative to historical averages, open interest has also grown over time. Thus neither currency look extended as a proportion of open interest.
The purpose of this weekly report is to track how the consensus is positioned across various 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) – February 6, 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.
The biggest changes in net positions this week includes rising Canadian dollar and US dollar index positions. As we wrote in last week’s take on the COT report, going long the Canadian dollar is increasingly in vogue thanks to improving domestic data and associated rate hike expectations. This week, speculators shed their short positions in the currency. Turning to the US dollar index, short positions in the contract are lower this week. While the US dollar remains in a bear market, the currency has been looking oversold in the short-term.
Sentiment not has yet to slow down euro strength
As the euro has been strengthening, net long positions in the common currency have continued to rise. Thanks to strong fundamental factors, the euro bull market still has legs. While sentiment looks stretched at first glance, we argue this ignores rising total interest in euro futures and options contracts. Today, net long positions are at a bullish extreme relative to 36-month trailing averages, but net positioning is only 19.9% of the total open interest. This is shown below:
Net positioning looks extreme, but not as a proportion of interest
As can be seen from the graphs above, looking at net positioning alone is somewhat misleading. While long positioning is two standard deviations above trailing 36-month averages, open interest remains within a normal range. Net positions as a proportion of open interest over a longer period of time is shown below:
Net speculative positioning has yet to exceed 25% of open interest
Looking at the graph above, one can see that long positions can climb higher before entering an extreme as a proportion of total open interest. In recent years, extremes have occurred in the 25%+ range. In January 2016, large short positions as a proportion of open interest foreshadowed a turning point for the euro. The euro consequently rallied in the first half of the year. At the time, total interest in euro futures and options totaled around 500,000 contracts. Last week, total interest in the euro was 722,138 contracts. Thanks to higher total interest, sentiment won’t hold back the euro bull market just yet.