USD positioning vs the six major currencies

<p>As the US dollar gives up all of its post-NFP gains, we revisit the case for the greenback with less fanfare and fireworks, and focus […]</p>

As the US dollar gives up all of its post-NFP gains, we revisit the case for the greenback with less fanfare and fireworks, and focus on the extent to which speculators have grown long the USD versus the major currencies.

Flow of USD positioning against the six majors

The chart below shows net speculative positioning in the futures market in each of the six major currencies against the US dollar. Net shorts in EUR and JPY against USD are the more striking, with EUR net shorts rising by more than 350% since March and JPY net shorts doubling over the same period.

GBP positioning shows it is the only currency among the 6 currencies, in which traders are net long against the USD, as shown by the 3,589 contracts in positive territory (above the grey axis).

CAD commitment reports reveal speculators have become net short CAD vs USD at 4,566 contracts: the first net short positioning in the loonie since late June. Similar to the case of AUD positioning, CAD flows have moved to negative in a uniform fashion as commodities fell rapidly, while USD bullishness broadened.

Peculiar positioning in Swiss franc

Interestingly, CHF positioning among futures speculators appeared the least volatile since late July, a 30% reduction in net short positions in the franc, which is modest relative to the change of positioning in other currencies.

The contrast also pales in comparison to the franc’s 6% decline against the US dollar over the same period, which in historical terms is a considerable decline.

A possible explanation to speculators’ relative reluctance in shorting CHF could be the uninterrupted seven-week decline in CHF vs USD and the decision by the Swiss National Bank to hold off from slashing the policy interest rate to negative. Although this not stopped spot traders from selling CHF vs. USD, the franc remained resilient against AUD, NZD and JPY, all of which are currencies with greater downside and more interest for shorts.

The case against non-USD currencies

EUR/USD’s slow downward drag has been a result of the ECB’s commitment to enter new territory via the path of ABS purchases and the possibility of fresh bond purchases. The ECB’s dependence on a weak euro to fight off the threat of disinflation is increasingly becoming a reality as Frankfurt has no choice but to see these ‘extraordinary measures’ succeed.

USD/JPY was principally boosted by Japan’s planned rebalancing of pension portfolios to include more foreign stocks and Tokyo’s commitment to a weak currency will go hand-in-hand, despite policy makers’ so-called concern with excessive yen weakness.

Current volatility in equities may dampen most yen crosses, thereby, triggering a short-squeeze on yen bears but the case for USD/JPY will await the Fed’s October decision.

GBP/USD has remained well inside its three-month downward on anticipation of the Fed’s ending quantitative easing this month, which could likely cap the bounces in the pair and may allow those who missed on the sell-off to re-enter the market.

Cable bulls will remind us that the Bank of England has two dissenting members voting for a rate hike, which is more than most central banks of the developed world. A ‘relative play’ that may be GBP-positive vs non-USD currencies.

But it’s also worth heeding the UK’s political uncertainty ahead of the May elections and the lingering risk of a “no” from the EU in two years from now.

AUD/USD has seen reprieve from the collapse in metals. Overnight remarks from the RBA, insisting the Aussie remains high despite its 9% decline in three months will not go unnoticed, especially as the iron ore prices are battered and China’s central bank strikes a disconcerting tone with regards to its outlook. AUD trades ought to beware of this week’s release of Aussie September jobs figures.

USD/CAD was boosted by Friday’s solid US jobs report, a host of negative CAD figures (weaker than expected July GDP, bigger than expected declines in retail sales and in August raw materials prices), and today’s release of a 27.3% plunge in August building permits, the second biggest drop since records began.

Most notably, non-residential permits tumbled 41%. Canada’s Sep employment figures are due Friday, expected to show a recovery following the 11k decline in the prior month.

USD/CHF has rallied predominantly on the back of SNB-driven boost in of the euro as traders witnessed the first four-day rally in EUR/CHF in 5 months. USD/CHF may remain supported by Switzerland’s ongoing threat to enter negative interest rates and the Fed’s expected removal of QE later this month.

IMM Futures Oct 7


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