Currency traders are gradually returning to the US dollar, perhaps encouraged by recent declines which saw the US dollar index fall the lowest level since last November’s US presidential election last week.
However, whether that buying interest will continue remains an unanswered question.
According to new research from ANZ, citing information from the latest Commitment of Traders report released by the US Commodity Futures Trading Commission (CFTC), traders bought a net $US2.9 billion last week — the second increase in a row — taking their overall net long position to $US16.5 billion.
Net positioning is simply the sum of long futures and option positions less short positions in a particular asset class.
ANZ uses non-commercial positions reported by the CFTC as they 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”.
Put another way, they are positions established to profit from an expected movement, in this case the US dollar.
This chart from ANZ shows the modest uptick in net US dollar longs, fuelled in part by continued selling against the Japanese yen and commodity currencies such as the Australian, New Zealand and Canadian dollars.
Khoon Goh and Rini Sen, currency strategists at ANZ, said the latest bout of dollar buying was concentrated against the Japanese yen.
“Funds were net sellers of JPY to the tune of $US2.5 billion, taking their overall net short position to $US2.7 billion, the highest in eight weeks,” the pair wrote in a note released on Monday.
US dollar buying was also fuelled by continued selling of commodity currencies, something that arose despite renewed strength across the commodities complex last week.
“Commodity currencies continued to struggle for a fourth straight week with a combined net selling of $US2.1 billion,” Goh and Sen said.
“With $US1.1 billion of net selling, CAD led the pack. Meanwhile, funds cut their net long AUD positions by $US900 million, bringing it down to $US100 million.
“Meanwhile, the NZD continued to see marginal selling of $US100 million in the week.”
However, while those currencies remain on the nose, ANZ said that buying interest remained firm for the euro with net short positioning declining to the lowest level seen in a year last week.
“Funds reduced their net short EUR position by $US1.8 billion to $US5.1 billion, the lowest in a year,” said Goh and Sen.
It was a similar scenario for the UK pound which saw net short GBP positions halve to $US500 million, the lowest level since before the UK Brexit referendum in June last year.
While net positioning in both the euro and pound remains short, it’s clear that many traders believe that further downside is now unlikely, hence the move to reduce bets speculation on further weakness.
And with recent US economic data starting to waver, coupled with US political concerns that flared again last week, it’s questionable whether the buying interest in the US dollar seen last week will persist.
Last Friday, the US dollar index — heavily influenced by movements against the euro and Japanese yen — fell to as low as 97.08, leaving it at the lowest level since November 9 last year, the day after the US presidential election.
It has now lost over 6% since early January this year.
Given the cutoff date for the CFTC data was last Tuesday, the recent price action hints that the buying interest in the US dollar may have already run its course.