Looking at the latest COT report, only the Canadian dollar remains in extreme territory. Following this week’s sharp decline in the currency, this is likely to change over the coming weeks. The euro and the US dollar are no longer in extreme territory as speculators build up their long US dollar positions. This is shown below:
CFTC COT (futures & options combined) – October 24, 2017
Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical trailing 1-year and 3-year trends. Looking at changes versus the previous week, speculators are trimming their US dollar short positions. This is particularly the case for currencies and commodities that are highly sensitive to future inflation such as the Japanese yen, Swiss franc and gold. On the other hand, speculators continue to build their long positions in crude oil (WTI), which benefits from the positive inflation outlook.
Changing fortunes for the Australian dollar
After peaking in late September, speculators appear to be losing their interest in the Australian dollar. The latest inflation figures (1.8% for Q3 2017) missed expectations, and have declined in rate-of-change terms after peaking in Q1 2017. Looking at GDP growth, year-over-year growth in Q2 came in at 1.8%, which is relatively weak compared to the recent past. As both growth and inflation disappoint, the Reserve Bank of Australia looks set to stay in neutral. Recent inflation and growth figures for Australia are illustrated below.
Ho-hum: recent Australian economic data remains mediocre
Earlier in the year, speculators were building their long AUD positions based on the belief that the RBA would be the next central bank to raise rates. Despite hopes that the RBA was set to follow its peers in the US and Canada, the Bank sees few reasons to consider hiking rates. Recent RBA minutes suggest that the status quo is set to continue. Given falling rate hike expectations, speculators are now trimming their large Australian dollar positions. This is shown below.
From bearish to extremely bullish
Earlier in July, futures speculators were short the Australian dollar, and 1-year z-scores fell almost one and half standard deviations below the 1-year average. After AUD/USD rallied towards 0.80, speculators then flipped to extreme bullishness. At its peak, speculators were long almost 78,000 contracts in futures and options on September 26. Since late September, net long positions have been trimmed substantially as hopes for higher interest rates fade into memory. As we argued in our recent commentary on the 19th Party Congress in China, the longer-term outlook for the Australian dollar looks weak.