Currency traders piled into the US dollar after last week's shock yuan depreciation

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Foreign exchange traders collectively increased bets for further US dollar gains last week with the Commodity Futures Trading Commission (CFTC) reporting a net gain in long positions of $3.4 billion to $27.6 billion.

A long position indicates that traders are speculating on further gains for a particular currency, in this case the US dollar.

A short position, on the other hand, indicates that traders are speculating on further weakness in a currency.

The increase, the fourth week in a row that long US dollar positions have swelled, captured positioning as at the end of trade last Tuesday, the day China’s central bank decided to adopt a new exchange rate setting mechanism for the yuan.

According to positioning reported by the Intercontinental exchange, the level of US dollar long positions – a direct play on movements in the US dollar index – is now at the highest level seen since mid-January.

The table below, supplied by ANZ, shows the respective changes in trader positioning recorded last week.

ANZ’s senior FX strategist Khoon Goh notes that net Japanese yen short positions jumped by $2.4 billion to $10.5 billion. Goh believes “the yuan devaluation sent Asian currencies weaker, including the JPY. Hence, it is not surprising that leveraged funds increased their bearish yen bets as a result”.

Elsewhere short positions in the Australian dollar rose by $0.4 billion, the eighth consecutive week that traders had added to bearish bets. Canadian dollar shorts, likely as a result of the crude oil price tumbling to fresh lows, also increased by $0.4 billion. While most are continuing to bet on further price declines, net short New Zealand dollar declined for a third consecutive week.

Commodity currencies aside, euro shorts declined by $0.4 billion to $8.7 billion. Goh puts the move down to traders unwinding EUR short positions against Asian currencies as renewed weakness took hold. With interest rates across the euro area so low, many traders had used the euro as a funding currency to finance bullish bets on futures gains in Asian currencies such as the yuan.

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