US Dollar Bear Market Continues: COT Report

Looking at this week’s Commitments of Traders Report, bullish extremes continue in long crude oil, the euro, and the British pound. Net-long positions have also grown this week for the two currencies and the commodity.

The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we flag extended positioning as a risk. Crowded positions do not suggest an imminent reversal, but should be considered as a significant risk factor when investing in the same direction as the crowd. This is shown below:

CFTC COT speculator positions (futures & options combined) – January 23, 2018

Source: CFTC, MarketsNow

Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages.

The biggest changes in net positions (as a proportion of open interest) this week includes falling net positions in the USD index and rising net positions in the Australian dollar and the Canadian dollar. Thanks to strong GDP growth outside the US, speculators continue to bet on dollar weakness. Commodity currencies including the Australian dollar and the Canadian dollar are also benefiting from strength in commodity prices. As data continues to suggest a sunny outlook for the global economy, speculators remain bullish and have been increasing their exposure to riskier investments.

Strong global growth = US dollar bear market

Looking more deeply at the US dollar, speculators continue to bet on future weakness. Net-long positions are growing in currencies that tend to strengthen during global economic upswings (such as euros and commodity currencies). Meanwhile, net short positions in liability currencies that function as safe havens (such as the US dollar, Swiss franc and the Japanese yen) continue to fall. As the world’s reserve currency, the US dollar tends to weaken during economic booms for reasons we described in a recent commentary. As these dynamics have persisted for quite a few weeks, there is little doubt that consensus sentiment is bullish.