Speculative Positioning In Selected Currency Futures

With the media playing up the U.S. dollar’s negatives, one would think speculators are shorting the greenback like there is no tomorrow. Yet, a review of the Commitment of Traders report that covers the week through last Tuesday, Aug. 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 125,000 euros per futures contract, 62,500 pounds, 100,000 Canadian dollars, and 500,000 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 Aug. 4, speculators had a record net long 181,000 futures contract. To appreciate what has happened, note that in late February, speculators had a net short position of 112,000 contracts, the largest in around 3.5 years. The gross long position increased by 20,000 in the most recent reporting period to 262,100, just shy of the 2018 record high. It stood around 147,000 in mid-March. The bears covered 3,100 gross short contracts to 81,500. In the past four months, the gross short position has been bouncing between 70,000 and 100,000 contracts. It is relatively small compared with the past 5-6 years.

British Pound: Speculators have a net short sterling position of 14,700 contracts as of Aug. 4. It is the least since mid-May. The bulls added another 6,600 contracts to the gross long position that brings it to 46,000 contracts. In early March, the gross long position was around 76,000 contracts. It fell to 27,000 in early June. The bears covered 4,000 contracts to reduce the gross short position to 60,700 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 23,200 contracts after having been reduced to -12,500 at the end of July, the smallest net short position since March. The increase of 10,700 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 32,100 contracts to 19,900 contracts. In the third week of July, the gross long position was rose 34,300 contracts, a four-month high. The bulls have rarely had a gross position of less than 20,000 Canadian dollar futures contracts since 2009. The bears covered 1,500 short contracts, leaving a gross short position of 43,100, 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 23,000 contract and has drifted lower to about 3,000 as of Aug. 4. In the most recent reporting week, speculators cut their gross long position by 9,200 contracts to 42,700. It is the smallest in a couple of months. In November-December 2019 and through early February 2020, the bulls were carrying over 200,000 peso contracts. For five weeks through late July, speculators gradually built a gross short position of nearly 41,000 contracts. About 1,300 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.