Looking at this week’s COT report, the British pound is now at a bullish extreme, while the Australian dollar is no longer at a bearish extreme. Bullish extremes continue in long euro and long crude oil speculator net positions.
The purpose of this 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) – January 9, 2018
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages.
The biggest changes in net positions (as a proportion of open interest) this week includes rising Australian dollar, gold and British pound positions, and falling Swiss franc positions. Last week, we wrote that Australian dollar speculators were stubbornly short in light of recent strength in the currency. This week, the shorts have given up and AUD net positions are once again net long. Gold traders are re-building their net long positions after giving up in early December (right before gold prices took off). Long crude oil positions continue to look very crowded, and have been the subject of multiple commentaries we have authored since last November. Lastly, net long positions in the British pound join the euro at a bullish extreme. Based on a trailing 3-year average of British pound net positions, current speculator positioning is more than two standard deviations above historical averages.
Ex-US growth = strong euro + strong pound
As the euro and the British pound hit new highs against the US dollar, it is hardly surprising to see speculators chasing momentum. As strong forward-looking indicators (such as Eurozone manufacturing PMIs and UK services PMIs) continue to suggest sunny days ahead, the euro and the pound remain on a strengthening path. Looking at GBP/USD and EUR/USD, the pairs are at multi-year highs today. Despite reservations regarding tough Brexit trade negotiations, we have argued that the pound looks set to keep rallying thanks to strong regional growth in Europe and the low valuation of the currency relative to other currencies. With regards to the euro, the common currency has few headwinds today as GDP growth remains strong and markets increase their bets on the ECB ending its asset buying program next year. While anonymous ECB officials have historically intervened (via media reports) each time EUR/USD has surpassed 1.20, this has not taken place in recent history.
Thanks to the US dollar’s role as a global reserve currency, the dollar tends to depreciate during global economic booms as the currency is borrowed heavily in offshore lending markets. This remains the case today as the dollar continues to slide despite strong expectations of further rate hikes.
Based on how euro speculators have been positioned over the past few years, one can see that going long euros has become a consensus net long over time. This is shown below:
Buy buy buy! Long euros continue to gain in popularity
Following its epic sell-off in 2014, speculators were net short the common currency until Macron’s presidential victory in May 2017 last year. While the initial jump in net long positions petered out at around +100,000 contracts starting in July 2017, euro bulls are once again building their net positions this year. Today, net long positions are approaching +150,000 contracts.
With Eurozone growth on track and no end in sight for the US dollar’s sell-off, both the pound and the euro look set to keep rallying despite speculator optimism hitting bullish extremes.