Traders are becoming increasingly cautious about the prospect for further US dollar strength in the period ahead.
According to the latest Commitment of Traders report from the US Commodity Futures Trading Commission (CFTC), long positioning in the US dollar fell to a multi-month low last week, coinciding with financial markets scaling back expectations for further US rate hikes in the year ahead.
Net positioning is simply the sum of all long trades minus the number of short trades in a particular financial asset, in this instance the US dollar.
A net long position implies that, on balance, most traders expect the US dollar to appreciate against a basket of currencies in the period ahead.
The chart below, supplied by ANZ’s senior FX strategist Khoon Goh, reveals the change in net long US dollar positioning as at the end of trade on Tuesday last week.
According to Goh, total US dollar net long positioning fell by $US5.6 billion to $US14.0 billion last week, fueled by traders swapping out of the US dollar in favour of the euro and Japanese yen.
In a survey of fund managers conducted by Bank of America-Merrill Lynch late last year, holding long US dollar positions was regarded as the most crowded trade across financial markets by investors, creating the risk of a reversal given so many were betting on continued US dollar strength.
Interestingly, despite the Bank of Japan adopting a negative interest rate policy (NIRP) at the end of January, net long positioning in the Japanese yen rose to US$1.9 billion, leaving it at levels not seen since October 2012.
While there is ongoing debate as to whether or not the Bank of Japan’s decision to introduce NIRP was designed to weaken the yen, on recent evidence, it appears FX traders don’t believe it will.
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