CFTC FX Positioning Update: Not What You Think

The latest Commitment of Traders report from the CFTC covers the week ending March 20.  Among the major currency futures, there was dramatic reduction of net short speculative positions.  To appreciate how this was achieved is only possible by disaggregating the data.  

The net speculative euro short position was cut to about 83k contracts from 99.3k the previous week.  This is the smallest net short position since the end of February.  In the previous week there was a decline of net short euro contracts roughly of the same magnitude. This was almost solely the function of shorts getting out.  However, this week the establishment of new euro longs was larger (10.1k) than the shorts exiting (6.3k).

The euro's resilience in recent days has been impressive.  It shrugged off the disappointing euro zone flash PMI that warned that the German economy may be sputtering.   Pressure in the euro zone is increasing, as reflected by the widening of spreads against Germany and the backing up of Spanish and Italian bond yields, and the widening of the U.S.-German 2-year interest rate spread.    The immediate range appears $1.3140-$1.3300, within the broader range of $1.30-$1.35.  

Many participants are monitoring the formation of a potential head and shoulders pattern in the euro.  A sustained move above the $1.3350 area will likely call it into question, forcing perhaps another round of short covering and the establishment of new longs.  Trend followers, however, note that the 5 day moving average has crossed back above the 20-day moving average at the end of the week.   

The net short yen futures position was slashed from 42.4k to about 25.8k.  It is the fourth week now that the net speculative position has been short yen.    This largely reverses the rise seen in the prior week.  Then long were cut in roughly as much as short were established.  In the most recent week, it was a different story, new longs (~12.6k) dominated the shorts being cut (~3.9k).  

Since the period that the CFTC data covers ended, the yen has been the strongest of the G10 currencies, appreciating about 1.6% against the dollar.  The week ended with the dollar slipping below its 20-day moving average against the yen for the first time since early February.  While there does appear to be some portfolio capital repatriation ahead of the fiscal year end, the impact on the yen itself seems marginal at best. Support for the dollar is seen just below JPY82.  A break could see a move back toward JPY80.60.  

Short covering was largely the driver of the decline in the net short sterling position from roughly 41.8k contracts to 15.8k.  It is the smallest net short position since September and about half of what it was at the end of February.  Short speculative positions were cut by about 22k contracts, while longs added 4k.  

Sterling was also resilient in recent days to a negative news stream that included more dovish than expected MPC minutes, disappointing data, including retail sales and a lukewarm reception to the government's budget.  Like the euro, many technicians see a topping pattern being carved out in sterling.  A move above the $1.5950-$1.6000 area would likely negate it.  Sterling's 5 day moving average turned above the 20-day average early last week. 

The Swiss National Bank continues to enjoy degree of success in keeping the Swiss franc out of play.  This is illustrated by the fact that 3-month euro-Swiss implied volatility is now below 3%, the lowest since August 2007. It peaked over 25% last August.   

The net short speculative position was trimmed to 11.2k from 14.8k, which is the smallest such position since the middle of February.  Longs grew by 2.4k while shorts were cut half as much.

In the second tier of the major currency futures, the net speculative position is long.  The Canadian dollar showed the largest jump, as the net long position has been building for the past seven weeks.  Net longs stood at 42.3k contracts, up from 26.7k in the prior week.  Interestingly, this was not as much a function of new longs (+3.2k) as as reduction of shorts (-12.4k).

The capitulation of these CAD shorts took place just before the the Loonie weakened sharply in the second half of last week.  It was the worst performing of the major currencies from March 20 to March 23, losing about 0.6%, weighed down by disappointing data and cross rate adjustments.    

The US dollar briefly traded above parity at the end of of the week, before reversing to finish near the session lows.  The price action should reinforce ideas that the Canadian dollar remains range bound.  Given the test on the greenback's upside appears to have failed, the rule of alternation suggests short-term operators should look for a move back toward CAD0.9860. 

The net long Australian position continues to be cut.  At 45.2k (down from 66.8k contracts the prior week), it is the smallest net long position of the year.  The longs were trimmed by 1.4k, but the shorts jumped by over 20k.  The warnings from BHP and the more generalized fear of a hard landing in China, coupled with strengthening ideas that the RBA will cut rates again in May.  

The Aussie was sold through the $1.04 support and fell to to the lowest level since mid-January after the CFTC reporting period ended.  However, it bounced back at the end of the week, but with the yen strengthening, the market may lack much conviction ahead of the March 31 release of the official Chinese PMI data.  

There was a large decline in the net long Mexican peso position.  It fell to 24.3k, down from almost 79k contracts previously.  It was the first decline since mid-January.  It is about half the net long position of the end of February.  It was not so much that longs took profits; they actually rose by 1k contracts.  It was the emergence of players trying pick a top in peso.  Short peso positions jumped 55.6k contracts.

The peso has been among the strongest, liquid currencies thus far this year, appreciating almost 9.6%.  The greenback has fallen from MXN14.00 to  MXN12.55 in the middle of March.  The dollar's downside momentum faltered, encouraging the dollar bottom pickers--peso top pickers.   However, the price action before the weekend that saw the dollar rise to almost MXN12.88 only to reverse lower and settle on the lows.   Initial support is seen in the MXN12.68-MXN12.70 area. Speculative players are talking about the rebound in oil prices and the new cyclical low in US weekly initial jobless claims.  Yet the end of the quarter may see some portfolio adjustments, which means taking profits on out performers and picking up some of the laggards.   

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