Currency traders did something last week that they haven’t done in months: they bought the US dollar.
According to ANZ, citing data released by the US Commodity Futures Trading Commission (CFTC) on Friday, traders bought the USD for the first time since mid-May, reducing their overall net short position by $US1.5 billion to $US5.8 billion.
A small yet significant sign that traders are becoming wary of chasing further weakness in the greenback given so much “bad news” has already been priced in.
Net speculative positioning, defined by ANZ as non-commercial positions reported by the CFTC, is simply the sum of long and short options and futures positions in a particular asset, in this case the US dollar.
“Given that the dollar had been sold for the previous 12 weeks straight and the level of short positions reached their highest in three years, some selling respite is not unexpected,” said Khoon Goh and Rini Sen, currency strategists at ANZ.
ANZ said that most of the buying last week occurred against the euro.
“Funds reduced their net long EUR position by $US2.1 billion to $US1.5 billion,” said Goh and Sen, noting that “this could be due to profit taking after EUR/USD failed to push further beyond the 1.19 level”.
“With the ECB minutes showing officials expressing concern over EUR strength, further scaling back of long EUR positions is possible,” they added.
The US dollar also found support against the New Zealand dollar and UK pound with net buying of $US500 million and $US400 million respectively.
However, traders continued to favour the Australian and Canadian dollars, along with the Japanese yen, registering net purchases of $US400 million, $US100 million and $US900 million respectively.
Net long positioning in the Australian and Canadian dollars now stands at the highest levels seen since early 2013, continuing to benefit from strength in commodity prices and expectations that both the Reserve Bank of Australia and Bank of Canada may tighten monetary policy settings in the period ahead.
Goh and Sen put continued demand for the Japanese yen down to heightened geopolitical tensions on the Korean peninsula.
While in absolute terms the US dollar found some rare buying support last week, ANZ remains cautious on whether that trend will continue in the near-term.
“With the minutes from the July FOMC meeting showing officials starting to question their inflation outlook, it is too soon to expect a major turnaround in short dollar positioning, Goh and Sen said.
While large net short positioning and dour sentiment levels appears likely to contain further US dollar weakness in the near-term, one suspects that upcoming US economic data, along with the ability of the Trump administration to deliver tax reforms and increased infrastructure investment, will largely determine how the greenback performs in the latter parts of the year given the implications for monetary policy settings from the US Federal Reserve.