Looking at previous week’s Commitments of Traders Report, changes in speculator positioning across major currencies and commodities are fairly limited. The most substantial changes can be seen in the US dollar index, British pound and Japanese yen. Net positions for all three currencies were up last week.

While speculator positions in the US dollar index are up this week, they are falling based on our implied measure of US dollar positioning. Following a turnaround that started last April, speculators have been increasing their bullish bets on the US dollar while shorting ‘risk on’ currencies. For now, speculators are also short safe haven currencies (such as the Japanese yen and the Swiss franc), in relation to the dollar.

Looking at extremes in positioning, there are few changes this week. The British pound net short position is no longer at a bearish extreme this week. Long US dollar, short euro and short gold remain two standard deviations above 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 21, 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

Looking at recent trading patterns in the yen, the currency has been trading in a narrow channel since the second quarter of 2017. More recently, the yen has weakened relative to the US dollar thanks to expectations for continued rate hikes. For now, the yen is ignoring significant weakness in financial markets outside the US (such as in Europe, China and other emerging markets). Given the yen's popularity in funding carry trades, the currency tends to strengthen in response to weakness in emerging markets. In recent history, popular carry trade currencies such as the Turkish lira, the South African rand and the Indian rupee have sold off sharply.

Turning to speculator activity in the yen, the net position has been rising for the past five weeks in a row (from -77,071 to -52,059 futures and options contracts this week). During this time, the yen made small gains versus the US dollar. Nonetheless, it is still too early to suggest that the yen has entered a bullish trend. Our outlook on USD/JPY is currently in neutral.