Currency traders continued to unwind bearish bets towards the euro and British pound last week, according to data released by the US Commodity Futures Trading Commission (CFTC) on Friday, seeing short positioning in both scaled back to just a fraction of the levels seen earlier this year.
But while traders continue to flock to the euro and pound, that same can’t be said for the Australian dollar. Positioning in currency turned net short for the first time since January this year.
Those currencies on the nose only a few months ago are now in demand, while those that previously looked good are being ditched at a decent clip.
According to Khoon Goh and Rini Sen, currency strategists at ANZ Bank, most of the buying in the euro and pound last week came against the US dollar.
“Dollar selling was concentrated primarily against the EUR,” the pair wrote in a note released on Monday.
“Funds reduced their overall net EUR short positions by $US3.5 billion to $US1.6 billion, the lowest since May 2014.
“This is the fifth consecutive week of EUR buying and if it continues, we could see leveraged funds turning net long EUR for the first time in three years.”
This chart from ANZ shows net speculative positioning in the euro compared to movements in the EUR/USD. Both have clearly shifted higher in recent weeks.
It was a similar story for the pound, says Goh and Sen.
“For six straight weeks now, funds have been net buyers of GBP,” they wrote. “Funds reduced their net short GBP positions by $US400 million to $US100 million.
The result left net short-positioning in the pound at the lowest level since June last year, before the UK Brexit referendum held on June 23.
However, given the recent price action in the pound, Goh and Sen suggest that buying may have slowed, or even reversed, late last week.
“A tightening up in the opinion polls showing the Conservatives’ lead over Labour is falling has weighed on GBP post the CFTC cut-off date, suggesting the six week run of net GBP buying could be coming to an end,” they said.
Still, even if that’s the case, short positioning in the GBP — like the euro — is now just a fraction of the levels it once was.
Outside of the major European currencies, the other story for the week perhaps came from the Australian dollar with net positioning turning short for the first time since January this year.
“AUD… saw net selling worth $US900 million,” said Goh and Sen.
“This is the eighth consecutive week of AUD selling, resulting in leveraged funds holding net short positions for the first time since January this year.”
Of the other commodity currencies, ANZ said that speculative short positions in the New Zealand dollar were scaled back by $US200 million to $US500 million while those in the Canadian dollar were essentially unchanged.
As this final chart from ANZ shows, the shift in speculative positioning across currency markets has changed substantially from what was reported just a few months ago.
Against the US dollar, short positions in the euro and pound — shown in dark blue and yellow respectively — are now near non-existent. On the other hand, positioning in commodity currencies and in the Japanese yen — shown in grey and orange — have switched from being long to being short, with the degree of bearish bets on each continuing to grow.
Net positioning is simply the sum of long and short options and futures positions in a particular currency reported by the CFTC. When net positioning is short it suggests the market, collectively, is looking for price weakness. Long positioning indicates that the opposite outcome is expected.
In order to determine speculative positioning in the data, ANZ uses non-commercial positions reported by the CFTC.
“Non-commercial traders’ positions are commonly seen as a proxy for leveraged positioning as they seek to profit from movements in the asset price as opposed to hedging business activities,” the bank says.
And while these are only figures from the CFTC, changes in positioning in its data can be used as a rough guide to both investor sentiment and positioning across the broader currency market.