The gloom surrounding the US dollar looks like it's slowly starting to lift

Photo by Jamie Squire/Getty Images

After months of selling, it appears that the gloom surrounding the US dollar is slowly starting to lift.

According to data released by the US Commodity Futures Trading Commission (CFTC), traders continued to buy the US dollar last week, extending the pattern seen in the previous two weeks.

“Leveraged funds were net buyers of USD for the third consecutive week,” said Khoon Goh, Head of Asia Research at ANZ Bank.

“Dollar demand was broad-based, with only the NZD not seeing net selling, though this was before the announcement that there would be a change in government.”

This chart from ANZ shows the change in net US dollar positioning from the CFTC data against the EUR, JPY, GBP, CHF, CAD, AUD and NZD since the start of 2014.

Source: ANZ

Over the week, net short speculative positioning in the US dollar was reduced by $US1 billion to $US3.7 billion, driven largely by buying against the euro and Australian dollar.

“EUR saw the most selling, with leveraged funds reducing their net EUR long positions by $US1.3 billion to $US1.4 billion,” said Goh.

“Among the commodity currencies, AUD saw the largest selling. Funds reduced their overall net long AUD position by $US900 million to $US5.2 billion.”

The greenback also found support against the yen ahead of the Japanese general election held on Sunday, along with buying against the Swiss franc, UK pound and Canadian dollar.

The New Zealand dollar was the only G10 currency to buck the trend with net long positioning increasing by $US300 million over the week.

Despite the uptick in demand, Goh says that the price action seen since the CFTC cutoff date last Tuesday suggests that buying was almost certainly reversed in the latter parts of last week.

“The announcement that there would be a change in government late last week after the CFTC cut-off date saw the NZD fall, suggesting an unwinding of long positions by leveraged funds,” he says. “It is possible that funds could turn overall net short against the NZD, which was last seen in late May.”

Net speculative positioning, defined as non-commercial positions, is the sum of long and short options and futures positions in a particular asset.

A net long position indicates that traders, collectively, are looking for further gains, while net short positioning indicates that they are positioning for further weakness.

While it only captures positioning reported by the CFTC, it can be used to extrapolate broader views held by currency traders.

Given the reduction in US dollar short positioning seen over the past three weeks, it suggests that an increasing number of traders are becoming wary of betting on continued weakness in the greenback given the substantial falls recorded in the first nine months of the year.

And with speculation over the prospect for US tax reform and a change in leadership at the US Federal Reserve continuing to build, it suggests there’s a growing risk of even further buying in the US dollar in the period ahead, helped in part by an unwinding of long positioning in the likes of the euro and Australian dollar which still remains at relatively high levels.

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