Looking at this week’s Commitments of Traders Report, changes in speculator positioning across major currencies and commodities are relatively limited. Speculators continue buying the US dollar, with positioning in both the US dollar index contract and our implied measure of US dollar positioning rising this week. In general, commodities are increasingly out of favor while speculators are now net short all major ‘risk on’ currencies. Notably, speculators are now net short the euro, for the first time since May 2017.

Looking at extremes in positioning, there are no significant changes this week. Long US dollar net positions are two standard deviations above 12-month trailing averages. On the other hand, short euro, short British pound and short gold positions are two standard deviations below 12-month trailing averages. Short gold and short Swiss franc positions are also at a bearish extreme, based on 36-month trailing averages.

The purpose of this weekly report is to track how the speculator community is positioned across various major 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) – August 14, 2018

Source: CFTC, MarketsNow

Notable extremes, significant changes in weekly positions, and large net positions as a proportion of open interest are highlighted in gray above. Extremes in net positions are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages. Weekly changes are highlighted when they are significant as a proportion of open interest. Finally, net positions as a proportion of outstanding interest are highlighted when they are large relative to historical averages. 1-year and 3-year z-scores are visually represented below:

1-year and 3-year z-scores based on net speculator positions

Source: CFTC, MarketsNow

While positioning in the euro was at a bullish extreme back this year, speculators have significantly reduced their bets on the common currency over the past few months. Since early June, speculator positioning in the euro has been two standard deviations below 12-month trailing averages (i.e. at a bearish extreme). This week, speculators flipped to net short for the first time since May 2017, following Macron’s victory in the French presidential elections. Thanks to slowing GDP growth and ideal conditions for the US dollar, investors are no longer betting on the “buy Europe” trade.

While net positioning may be at a bearish extreme already, our view is that the euro has room to fall much further. During previous euro bear markets, speculator positioning in the euro has fallen to as low as -200,000 futures and options contracts. While comparing the current position relative to historical averages is a worthy exercise, extremes in positioning do not always foreshadow turning points. This is particularly the case for currencies and commodities which tend to be supported by strong, long-term trends. In this case, looking at historical positioning in the euro is more instructive. From this perspective, the euro has much further to fall.