FX traders are losing faith in further US dollar strength

George Michael. Photo by Michael Putland/Getty Images

Despite the prospect of a near-term interest rate hike in the US, something that garnered traction following the Jackson Hole central bank symposium held two weeks ago, FX traders continued to reduce their net long positioning in the US dollar last week, according to the latest Commitment of Traders (COT) report released by the US Commodity Futures Trading Commission (CFTC) on Friday.

According to ANZ, citing the report, leveraged funds reduced their net long USD positions for a fourth consecutive week, leaving them at the lowest level seen since early July.

“Funds reduced their overall net long USD positions by $US3.1 billion to $US7.7 billion, the lowest in eight weeks,” said Khoon Goh, head of Asia research at ANZ, noting that “USD selling was broad-based against all major currencies”.

“This is despite a rise in the DXY [US dollar index] following US Federal Reserve Chair Yellen’s Jackson Hole speech arguing that the case for a rate rise has strengthened,” said Goh.

The net figure is simply a sum of all long and short US dollar positions reported in the COT release. It can be seen in the chart below from ANZ, overlaid against the movement in the US dollar index over the same period.

In this instance, the analysis from ANZ captures positioning of leveraged investors, or speculators. ANZ looks at this component as it is “commonly seen as a proxy for speculative positioning as they seek to profit from movements in the asset price as opposed to hedging business activities”.

In other words, it could be used to extrapolate broader market views on where investors believe a currency is heading.

It also captures positioning as at the close of business in New York each Tuesday, meaning last week’s figure does not capture adjustments made following the release of the US August payrolls report last Friday.

According to ANZ, there was net selling of the dollar against the euro, UK pound, Japanese yen, along with the Canadian, Australian and New Zealand dollars.

Of note, speculators increased their net long positioning in the Japanese yen by $US0.9 billion to $US7.0 billion, the highest level seen since December 2011.

After months of relentless selling, investors were also net buyers of the British pound for the first time since the Brexit referendum in late June.

This table from ANZ shows the net movement in speculative positioning seen last week, along with total net positioning against individual currencies.

While the speculative community remain net long the US dollar, indicating that traders, on balance, expect it will continue to strengthen, the continued reduction in long positioning suggest that conviction in that call is starting to wane, and fast.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.