After months of selling, FX traders now like the look of the US dollar.
According to the latest Commitment of Traders (COT) report released by the US Commodity Futures Trading Commission (CFTC), net US dollar long positions rose to $US16.3 billion last week, up $US2.9 billion on the levels of a week earlier.
Net positioning is simply the sum of outstanding short and long positions held by speculative investors.
It now stands at the highest level seen in six months, a period that corresponded with concern surrounding the outlook for the Chinese economy.
It is also worthwhile noting that the report captured positioning as at the close of business on Tuesday, August 2, before the release of the strong US non-farm payrolls report for July on Friday.
The chart below, supplied by ANZ Bank, tells the story. It looks at net long US dollar positioning against the euro, Japanese yen, British pound along with the Canadian, Australian and New Zealand dollars, overlaid against movements in the US dollar index.
According to Khoon Goh, head of Asia research at ANZ, “USD buying was broad-based despite the DXY [dollar index] declining following the July FOMC and BOJ meetings”.
“This suggests a strong interest to buy dollars on dips,” he wrote in a research note released on Monday.
Goh notes that largest positioning change in the week occurred in Japanese yen with leveraged funds reducing their net long JPY positions by $US1 billion, something he notes “could be due to profit taking”.
Elsewhere net British pound shorts were increased for the fifth week in a row, while commodity currencies (CAD, AUD, NZD) saw net selling, halting five weeks of gains.
The table below, supplied again by ANZ, shows the changes in net positioning over the week.
The data used by ANZ to collate this analysis comes from non-commercial positional changes in the COT report.
“Non-commercial traders’ positions are 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,” he notes.
While this only covers speculative positioning from one source, it can be used to extrapolate broader investor sentiment to movements in currency markets.
“We find that this typically has a slightly stronger correlation with the exchange rates that we are interested in,” says Goh.