Currency traders continue to flock back to the US dollar, enticed by the prospect of US tax reforms and a change in leadership at the US Federal Reserve.
According to ANZ, citing data from the US Commodity Futures Trading Commission (CFTC), speculators bought the greenback yet again last week, continuing the pattern since the start of October.
“Dollar demand was broad-based across all major currencies, in line with its strong price action on progress in proposed tax reforms and ahead of the announcement of the next Fed Chair,” said Irene Cheung and Rini Sen, currency strategists at ANZ Bank.
“Overall net short USD positions were reduced by $US3.7 billion to $US1 billion, the lowest net shorts since July this year.”
The reduction in US dollar short positioning is seen in the chart below from ANZ.
Net speculative positioning, defined as non-commercial positions reported by the CFTC, is the sum of long and short options and futures positions in a particular asset, in this case the US dollar.
A net short position indicates that traders, collectively, are looking for weakness in the period ahead, while net long position indicates they are positioning for further strength.
While it only captures positioning reported by the CFTC, it can be used to extrapolate broader views held by currency traders.
So with the buying seen in October, the level of bets against the greenback has now fallen to the lowest level since July this year.
Coinciding with the reduction in short positioning, the US dollar index — largely reflecting movements in the greenback against the euro and Japanese yen — has rallied over 4% from the near-two year low of 91.01 struck in early September this year.
Cheung and Sen said that most of the dollar buying last week occurred against the Japanese yen.
“[The Japanese yen] saw the most selling with net shorts reaching the highest since June 2015,” they said.
“Funds added $US1.4 billion to take their net short JPY positions to $US11 billion as a strong victory for Prime Minister Abe in the elections pointed to a continuation of BoJ’s easy monetary policy.”
Traders also bought the greenback versus the euro and commodity currencies such as the New Zealand, Australian and Canadian dollars, reducing their net long positions by $US600 million and $US900 million respectively.
The cut-off date for the CFTC data was Tuesday, October 24.
Given the price action in major currencies in the second half of last week, especially in the euro, the next CFTC release may show that US dollar positioning among speculators has turned net long for the first time in several months.
“Post the CFTC cut-off date, better-than-expected Q3 GDP released last Friday and prospects of tax cuts have likely kept funds attracted to the USD,” Cheung and Sen say.
In a note released late last week, Brian Martin, Head of Global Economics at ANZ, said several factors — including potential US tax reforms, tighter labour market conditions and likely a pickup in US inflationary pressures — were likely to support the US dollar against the euro in period ahead.
Ray Attrill, Head of FX Strategy at the National Australia Bank, is also watching the progress of US tax reforms closely, describing it as a “key swing factor for the USD” in the days and weeks ahead.
Along with upcoming economic data and a possible change in leadership at the US Federal Reserve, tax reform will likely dictate movements in the US dollar, and shifts in market positioning, in the final throngs of 2017.