Looking at this week’s Commitments of Traders Report, bullish extremes continue in long crude oil, the euro and the British pound. Net long positions have also grown this week for the two currencies and the commodity.
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 23, 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 falling net positions in the USD index and rising net positions in the Australian dollar and the Canadian dollar. Thanks to strong GDP growth outside the US, speculators continue to bet on dollar weakness. Commodity currencies including the Australian dollar and the Canadian dollar are also benefiting from strength in commodity prices. As data continues to suggest a sunny outlook for the global economy, speculators remain bullish and have been increasing their exposure to riskier investments.
Strong global growth = US dollar bear market
Looking more deeply at the US dollar, speculators continue to bet on future weakness. Net long positions are growing in currencies that tend to strengthen during global economic upswings (such as euros and commodity currencies). Meanwhile, net short positions in liability currencies that function as safe havens (such as the US dollar, Swiss franc and the Japanese yen) continue to fall. As the world’s reserve currency, the US dollar tends to weaken during economic booms for reasons we described in a recent commentary. As these dynamics have persisted for quite a few weeks, there is little doubt that consensus sentiment is bullish.
Net speculator positions in the USD index and z-scores based on 3-year trailing averages are shown below:
Low and lower: net positions in the US dollar continue to fall
Looking at the graph above, net speculator positions fell sharply in late June and turned negative in late July. Following the victory of Emmanuel Macron in the French presidential elections, speculators began betting on a stronger euro. Prior to the elections, many hedged their euro positions (using dollars or yen) given the perceived risk of a Eurozone breakup. As the euro has a weighting of 57.6% in the USD index, speculators dumped their long USD index positions in anticipation of a stronger euro. US inflation also began trending down in the first quarter of 2017, further worsening the US dollar outlook.
USD looks oversold, but bear market remains intact
In our US dollar daily update, we have commented that the US dollar is looking technically oversold using a range of indicators and time frames. While the dollar looks susceptible to a short-term relief rally, the conditions for a longer-term bear market remain intact.
Specifically, all indications continue to suggest strong growth outside the United States. In Japan, Nikkei manufacturing PMIs jumped to an 11-year high last week. Similarly, German business sentiment jumped an all-time high according to a recent IFO survey. As economic data in major regions point to stronger future growth, it’s still too early to call for a reversal in the dollar’s fortunes. As such, the US dollar bear market is likely to continue.