Currency traders continue to scale back bets looking for further US dollar strength, according to data released by the US Commodity Futures Trading Commission (CFTC) late last week.
This chart from the ANZ shows the recent reduction in net long US dollar positioning, particularly against the euro which is shown in dark blue.
It captures net speculative positioning in the US dollar in relation to major currencies such as the euro, Japanese yen, UK pound, Swiss franc and commodity currencies like the Australian, New Zealand and Canadian dollars.
Net positioning is simply the sum of long and short options and futures positions in a particular currency reported by the CFTC in its weekly Commitment of Traders (COT) report, released each Friday. When net positioning is short it suggests the market, collectively, is looking for price weakness. Long positioning indicates that the opposite outcome is expected.
In order to determine speculative positioning, ANZ uses non-commercial positions reported by the CFTC as they "seek to profit from movements in the asset price as opposed to hedging business activities".
While the market as a whole is still net long US dollars, it's fallen substantially from levels seen earlier in the year when the greenback was scaling fresh multi-year highs on the back of optimism towards the Trump administration's ability to spur on faster economic growth, and with it higher inflation and more rate hikes from the US Federal Reserve.
"Overall net long USD positions were reduced by $US1.3 billion to $US11.9 billion," said Khoon Goh and Rini Sen, strategists at ANZ.
"Positioning on the ICE US Dollar Index, which is directly tied to the DXY [US dollar Index], has been declining for seven consecutive weeks.
"This is a better indication of USD sentiment."
On Friday, the DXY fell to the lowest level since the US presidential election following a weaker-than-expected US non-farm payrolls report for May, taking its losses from earlier this year to nearly 7%.
Given the cutoff for the CFTC data is the close of business each Tuesday -- before payrolls report was released -- Goh and Sen say that "another week of dollar selling looks likely".
Helping to explain the scaling back of US dollar long positioning seen this year, ANZ notes that net short speculative positioning in the euro -- the largest component in the DXY -- has now all but been unwound.
"Funds reduced their overall net EUR short positions by $US1.4 billion to $US200 million, the lowest since May 2014," they said.
It's now basically flat, a stark turnaround to the view expressed late this year when traders were falling over themselves to bet on further weakness in the euro.
And given the price action in the euro late last week, there's a chance that net positioning may turn long when the next COT report is released this Friday.
How times have changed, driven by improved euro-area data and souring sentiment towards the outlook for the US economy.
While traders continued to scale back bets looking for further euro weakness last week, movements in other major currencies were mixed with short positioning in the UK pound and Japanese yen both increasing while short positions in the Australian, new Zealand and Canadian dollars were reduced.
"After six consecutive weeks of buying, funds finally turned net sellers of GBP, possibly in response to opinion polls showing a tightening race in the UK’s 8 June general election," Goh and Sen said.
Net buying was also recorded across all three commodity currencies, the first time that was seen in 12 weeks.
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