by Marc Chandler
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With the media playing up the US dollar’s negatives, one would think speculators are short the greenback like there is no tomorrow. Yet a review of the Commitment of Traders report that covers the week through last Tuesday, August 4, shows that this is not really the case.
Below the speculative positioning of four currency futures is reviewed. Only the euro stands out in terms of extreme positioning. Speculators are still net short sterling and the Canadian dollar. The net long Mexican peso position is very small (3k contracts).
Futures are standardized forward currency contracts. The amounts are fixed but vary by currency. There are 125k euros per futures contract, 62.5k pounds, 100k Canadian dollars, and 500k pesos. Traditionally, most observers focus on the net positioning, but what is vulnerable to a short-covering rally or long liquidation is the gross position. Both are discussed below.
Euro: As of August 4, speculators had a record net long181k futures contract. To appreciate what has happened, note that in late February, speculators had a net short position of 112k contracts, the largest in around 3.5 years. The gross long position increased by 20k in the most recent reporting period to 262.1k, just shy of the 2018 record high. It stood around 147k in mid-March. The bears covered 3.1k gross short contracts to 81.5k. In the past four months, the gross short position has been bouncing between 70k and 100k contracts. It is relatively small compared with the past 5-6 years.
British Pound: Speculators have a net short sterling position of 14.7k contracts as of August 4. It is the least since mid-May. The bulls added another 6.6k contracts to the gross long position that brings it to 46k contracts. In early March, the gross long position was around 76k contracts. It fell to 27k in early June. The bears covered 4k contracts to reduce the gross short position to 60.7k contracts. In the previous reporting position, the gross short position reached its highest level of the year so far.
Canadian Dollar: The bears still have the upper hand in the Canadian dollar futures. Speculators are net short 23.2k contracts after having been reduced to -12.5k at the end of July, the smallest net short position since March. The increase of 10.7k contracts was the largest since the end of March as well. It was the result of longs being liquidated faster than shorts were covered. The bulls chopped the gross long position from 32.1k contracts to 19.9k contracts. In the third week of July, the gross long position was rose 34.3k contracts, a four-month high. The bulls have rarely had a gross position of less than 20k Canadian dollar futures contracts since 2009. The bears covered 1.5k short contracts, leaving a gross short position of 43.1k, the smallest in almost four months.
Mexican Peso: After bottoming with a small net short position in May, the speculators built a small net long position. It peaked in late-June at around 23k contract and has drifted lower to about 3k as of August 4. In the most recent reporting week, speculators cut their gross long position by 9.2k contracts to 42.7k. It is the smallest in a couple of months. In November-December 2019 and through early February 2020, the bulls were carrying over 200k peso contracts. For five weeks through late July, speculators gradually built a gross short position of nearly 41k contracts. About 1.3k short contracts were bought back during the reporting period.
Of course, positioning in the futures market is a small part of the $6.6 trillion-a-day turnover in the foreign exchange market. It appears to be a good proxy for short-term and momentum traders who may operate in the OTC market. While the speculative positioning in the euro is extreme, that is not the case for the other currencies review here. It suggests that if there is indeed a correction in the currency market like we suspect is at hand, the euro will likely underperform.
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