Everybody's Betting On A Weaker Dollar

Note: My approach for analyzing CoT data to reveal how different types of traders are positioned in the futures markets is outlined here. If you missed it, give the article a read to see the method behind my analysis. All data and images in this article come from my website.

This article outlines how traders are positioned and how that positioning has recently changed. I break down the updates by asset class, so let’s get started.

Commodities

CoT data revealed just how crowded coffee (JO) shorts were in July. A month ago, speculators had a five-year net CoT percentile of close to 0%. This meant that their net position as a percentage of open interest was extremely low relative to the past five years. Here’s how to interpret that.

Crowded short positioning, which I define as a five-year percentile of net positioning as a % of OI < 10%, isn’t simply a reason to go long. Traders who were short coffee had zero incentive to exit their positions as long as the trend kept going their way. But the price of coffee started to reverse, which should have concerned those with big short exposure. This is because crowded shorts tend to head for the exits (to close their shorts) at the same time. I call this a “fire in the theater” situation. This is exactly what we’ve seen in coffee future over the past few weeks.

Commercial producers are on the other side of this trade. A high CoT percentile for producers and users translates to a low amount of producer shorts plus a high amount of user longs. You can infer that “smart money” commercials are bullish when producers don’t hedge a lot of their future production.

We’ve got the opposite situation in feeder cattle futures, where commercial producers are actively hedging their future production.

Speculators added to their long exposure and cut shorts last week in gold (GLD) futures.

Their net position is currently ~23% of the open interest, which falls within the historical range. I interpret this to mean that spec positioning in gold is neither overly long nor short.

And, here’s my CoT chart for gold.

CoT data helped traders avoid going long natural gas (UNG) last winter. Speculators were in a very crowded long position, and the commodity has only gone down since.

Traders are currently net long $3 billion worth of silver (SLV) futures, a drastic reduction of $8 billion from their positioning highs in April.

Here’s my CoT chart for silver.

Net spec positioning in WTI crude (USO) is approaching extreme levels.

Currencies

The Mexican peso (EWW) is an extremely crowded long trade. Spec net long positioning is almost 80% of the contract’s open interest, a historical extreme.

Here’s my CoT chart for the currency. With a CoT percentile of 100%, traders haven’t been this net long MXN/USD futures in five years.

The Japanese yen (FXY) is one of the few foreign currencies that speculators aren’t overly bullish on. This is to be expected, since we’ve been in a risk-on environment for 18 months, and the yen is typically viewed as a safe haven asset.

Traders are very long NZD/USD (ENZL) futures, betting on the New Zealand dollar to keep rising in value relative to the USD.

You’ve probably read about how crowded the long EUR/USD (FXE) trade is. Nothing has changed in the past few weeks. It will be worthwhile to watch for a technical breakdown in the currency, because a lot of shorts would be under pressure if the euro started to reverse.

Stocks

Last July, traders had $20 billion of net short exposure combined between the S&P (SPY), Nasdaq (QQQ), and Dow (DIA) e-mini contracts. They’re now net long $53 billion. This is a rapid shift, and net long exposure has only been higher in 2013 and 2014.

I was surprised to see speculators leaning to the short side in Nikkei (EWJ) futures.

Here’s how traders are positioned in S&P 500 futures. They’ve steadily increased their net long exposure since the 2016 lows. Long positioning isn’t extreme, but it’s close.

Let’s talk about VIX (VXX) futures. You’ve likely seen a chart showing that speculators have never been short so many VIX futures contracts. And, that’s true. But it’s important to adjust net spec positioning for a contract’s open interest. Here’s how OI has grown for VIX futures.

Roughly a 10x increase in less than 10 years. So, of course, the nominal net positioning numbers are going to be large. Here’s the data adjusted for the growth in OI.

It’s also interesting to note that the $ amount of open interest hasn’t really increased much since 2012. This is because the price of VIX futures has drifted lower.

Conclusion

Here’s a final overview of how speculators are positioned in all of the commodity markets I track. Agricultural and livestock futures are crowded on the long side, and soft commodities and platinum are heavily shorted.

And, here’s that same metric for financial futures. As you can tell, a majority of traders are betting on a weaker USD.

So, what are the main takeaways from this week’s CoT data? Two things:

  1. Traders are (still) betting a huge amount of money on a weaker U.S. dollar
  2. Smart money commercial traders aren’t hedging much of their future production in soft commodities like sugar, cocoa, and OJ. This implies that they think prices are heading higher

If you have any questions about CoT data, don’t hesitate to ask me in the comments below.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked in this article or incorporated herein. This article is provided for guidance and information purposes only. Investments involve risk are not guaranteed. This article is not intended to provide investment, tax, or legal advice. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.