There seems to be little sign of any weakening in the desire of speculative accounts to hold long dollar positions, despite the extremity of their positions (they recently reaching fresh record highs according to CFTC Commitments of Traders reports). This is, perhaps, not that surprising given how well this strategy has served them over the past two months. However, perhaps of greater interest, there has been a notable rise in long futures positions in the Australian dollar (AUD) and Canadian dollar (CAD) since the start of the month.
Although the data from the futures markets shows that speculative players never actually went net short of AUD, it is certainly true that there was an extremely sharp reduction in the size of the long position between the end of March (when the position stood at 54,991 contracts long) to the start of June (when the position stood at just 5,924 contracts long). The sharp rise in the size of the net long position over the past four weeks (to 33,395 contracts) is therefore particularly noticeable. The shift in positioning in CAD contracts is also noteworthy. Between the end of March and the end of May the overall position of non-commercial accounts moved from net long 31,547 contracts to net short 33,492 contracts. Since then the net short position has been completely wound up, to leave the speculative community all but flat.
This rise in the appetite of speculators to hold commodity currencies stands out as being particularly interesting precisely because it comes at a time when the speculative community remains otherwise particularly dollar bullish. Moreover (unlike their positioning in the greenback) there would still appear to be plenty of room for them to increase the size of their positions to reflect the continuing bullish story from the commodity markets (which in itself is an indirect reflection of the China growth story). In this regard, it is also interesting that the latest data also shows speculators finally starting to build long positions in oil futures as well.
The second quarter was characterised by a drying-up of investor inflows into a wide range of markets as levels of risk aversion rose. Signs that investors are becoming more risk tolerant have only really started to emerge over the last month as they began to return to the markets of Greater China (and to a lesser degree elsewhere). There were, however, two particularly notable exceptions to this pattern. According to our own iPFM data, investors continued to demonstrate a strong appetite for AUD and Norwegian Krone (NOK) assets throughout the course of this year. Although demand for CAD denominated assets remained muted through much of Q2, it is also worth highlighting that there has been a sharp rise in demand over the past month (both bonds and equities).
In an environment where real money investors are only just starting to show a desire to return to global markets while speculators still seem extremely dollar bullish, the picture for the commodity currencies stands out as the exception. It is clear that both real money investors and speculators are showing a strong interest in these currencies (as well as the underlying asset markets). Moreover, it is obvious from the recent positioning data that there is still plenty of space for the speculative community to increase the size of its exposure to these currencies. As such (and given our view that the China story will continue to dominate in a wide range of markets in the months ahead) we continue to see plenty of upside for this particular currency grouping.
Neil Mellor is a currency strategist at the Bank of New York
Researched and published in association with The Bank of New York
