by Marc Chandler
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The US dollar staged an impressive reversal against many of the major foreign currencies on May 3. In the following week, speculators in the currency futures market made significant adjustment in their holdings. We identified a change in the gross position in the currency futures of 10k contracts or more to be significant. In the week ending May 3, there were two such adjustments. In the CFTC reporting period ending May 10, there six of the 16 gross position we track surpassed the 10k contract threshold. Let’s begin by look at the three currency futures in which speculators carry a net short position: the euro, sterling, and the Mexican peso.
Euro bulls and bears made significant adjustments. The bulls took profits on 11.8k contracts to leave a gross long position of 101.3k contracts. The bears continued to cover shorts and took out another 13.5 contracts to leave 123.1k still short. This is the smallest gross short euro position since July 2014. In early December, it stood at 262k contracts. The adjustment saw the net short euro position slip to 21.9k contracts from 23.6k. The net short position has been reduced for eight weeks running.
Similarly in sterling, speculators reduced both gross long and gross short exposure in the Commitment of Traders week ending May 10. The gross short position was pared by 14k contracts to 72.6k. The gross long position was reduced by almost 20%, as 14k contracts were liquidated, leaving 37.6k. The net short position slipped to 34.9 contracts from 40.4k to extend the reduction for the third consecutive week.
While many observers will note that the net short position of sterling and the euro fell, what is missed by not looking at gross positions is that speculators reduced exposure. That is the takeaway and differs markedly with how speculators adjusted their Mexican peso position. Here is is fair to say that speculators were decisively bearish the peso. The net short position grew almost four-fold to 45.2k contracts from 12.4k. The bulls cut their gross long holdings by more than 50% (19.6k contracts) to leave 16.1k contracts, which is the smallest since July 2014. The gross shorts were grown by 13.2k contracts to 61.4k. Here too the positioning is light. The increase in the most recent reporting period comes after the gross short position fell to its lowest level since October 2014.
In addition to the euro, sterling, and peso, there was only one other significant position adjustment. It was the Australian dollar, which since May 3 has been the worst performing of the major currencies. It actually peaked a week before then. Speculators cut their gross long holdings by 16.3k contracts after liquidating 10.9k contracts in the prior reporting period. At 82.8k contract, the gross long position is the largest after the euro (101.3k) and yen (88.9k). Speculators shaved 2k contracts from the gross short position to 44.6k.
Although the adjustment of speculative positioning in the yen was minor, many will be interested in the underlying trend. Recall Finance Minister Aso has warned that the speculative move could be countered by intervention if necessary. Rather than the politically charged environment push participants to the sidelines, they increased their exposure. For the third consecutive week, speculators in the futures reduced their net long yen position, which now stands at 59.0k contracts.
The gross long position increased by 3.3k contracts to 88.9k. It snapped a two-week decline from a record 105.7k contracts. The gross short position rose even more. The 5.7k contract increase lifts the gross short speculative position off a 3.5 year low to 29.9k contracts.
Speculators barely changed their holdings of the 10-year Treasury note futures. The bulls added 1.8k contracts to 430k. The bears reduced their shorts by less than 1k contracts, leaving 509.3k. The net short position slipped inconsequentially to 79.3k contracts from 82.0k.
In the light sweet oil futures, speculators were of two minds. The bulls took a profit on 8.2k contracts, trimming the gross long position to 521.8k contracts. The bears may have been encouraged by ideas that the recent supply shock may be short-lived. They added 18.4k contracts to raise their gross short position to 229.8k contracts. The net speculative position fell 26.6k contracts to 292k.
| 10-May | Commitment of Traders | |||||
| Net | Prior | Gross Long | Change | Gross Short | Change | |
| Euro | -21.9 | -23.6 | 101.3 | -11.8 | 123.1 | -13.5 |
| Yen | 59.0 | 61.5 | 88.9 | 3.3 | 29.9 | 5.7 |
| Sterling | -34.9 | -40.4 | 37.6 | -8.4 | 72.6 | -14.0 |
| Swiss Franc | 6.9 | 6.8 | 22.7 | 1.4 | 15.8 | 1.3 |
| C$ | 25.9 | 18.9 | 42.0 | 2.2 | 16.2 | -4.7 |
| A$ | 38.2 | 52.4 | 82.8 | -16.3 | 44.6 | -2.0 |
| NZ$ | 9.4 | 9.2 | 33.6 | 8.3 | 24.2 | 8.1 |
| Mexican Peso | -45.2 | -12.4 | 16.1 | -19.6 | 61.4 | 13.2 |
| (CFTC, Bloomberg) Speculative positions in 000’s of contracts | ||||||
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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