Traders aren't as bearish on the US dollar as they were a few months ago

Matt King/Getty Images
  • The US dollar index, or DXY, has had a good run recently, adding nearly 5% since mid-February.
  • The bounce coincides with a raft of short covering from currency traders, leaving net US dollar positioning among leveraged investors long for the first time since mid-January.
  • With market positioning more evenly balanced, it suggests the tailwinds from US dollar short covering are likely to ease in the period ahead.

The US dollar index, or DXY, has had a good run recently, adding nearly 5% since mid-February.

As seen in the daily chart below, that’s helped the DXY recoup some of the losses seen throughout 2017 and in early 2018.

It’s not been a big rally by any stretch, but it has bucked the trend seen for well over a year.

While stronger US economic data and signs of a slowdown elsewhere, especially in Europe, have contributed to the DXY’s reversal, the question many are now asking is whether the move will continue?

No one knows the answer for sure, but if new data from the US Commodity Futures Trading Commission (CFTC) is anything to go by, one of the tailwinds that helped to propel the DXY higher recently appears to have run its course.

Leveraged investors, as a collective group, are no longer short the greenback.

As seen in the chart below from ANZ Bank, net US dollar positioning against other major currencies from leveraged funds is now long, corresponding with the bounce in the DXY over the past few months.

ANZ Bank

Net speculative positioning, defined as non-commercial positions reported in the CFTC’s weekly Commitment of Traders (CoT) report, is the sum of long and short options and futures positions in a particular asset, in this case the US dollar.

A net long position indicates that leveraged funds, collectively, are looking for further gains.

ANZ says non-commercial trader positions are commonly seen as a proxy for leveraged positioning as they seek to profit from movements in the asset price. While it only captures positioning reported by the CFTC, it can be used to extrapolate broader views held by currency traders.

Irene Cheung and Rini Sen, FX Strategists at ANZ Bank, said leveraged funds, typically hedge funds and money managers, are now net long the US dollar for the first time since mid-January.

“Leveraged funds turned net long USD for the first time since mid-January as dollar buying extended to the fourth consecutive week,” they said in a note released today.

“Funds were a net USD buyer of $US3.1 billion, turning from a net short into a long USD position of $US500 million.

“Thus, much of the short USD covering by funds has already taken place.”

So after being bearish on the US dollar’s prospects for most of the year, leveraged funds are now far more balanced in their views, at least based on market positioning.

While net US dollar speculative positioning among other institutional investors is still very short, as seen in the chart below, it too has reduced in recent weeks, hinting the tailwinds the DXY enjoyed from short covering since mid-February are unlikely to be as strong in the period ahead.

ANZ Bank

“Net speculative short positions in the USD against other currencies are now barely a third of what they were at their recent peak, suggesting the USD no longer has the tailwind from position unwinding that was almost certainly a factor behind recent strengthening,” said Ray Attrill, Head of FX Strategy at the National Australia Bank, in relation to the report.

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