In March 2020, a trend began in which the USD broadly seemed to lose value against major world currencies. It was the pandemic shock in the financial markets that may have led to USD stripping and a turnaround in the earlier trend of strengthening the US currency.
A year has passed since those events, when, for example, the euro cost $1.07 and the pound less than $1.15. It seems, however, that the so-called commodity currencies have gained the most against the USD over the year. Such a trend may have been triggered by hopes for economic recovery and rebuilding demand for industrial commodities and oil. For the year, AUD/USD rose by more than 33 percent, NZD/USD by less than 26 percent, and GBP/USD rose by almost 20 percent. Throughout the unusual year, investors seemed to turn so far away from the USD that futures positioning fell to its lowest level in at least a decade, according to CFTC data and a COT report.
Net long positions on USD index futures as recently as February stood at more than -13,000 contracts among the non-commercial investor group, which was even lower than the last local record of -12947 contracts from late 2012. With such extreme market sentiment, we could wonder if the market is too radically positioned for USD weakness. Then, in early 2021, it seemed that the first quarter might bring a larger correction and USD strengthening.
Through the prism of EUR/USD from the 1.23-1.24 area, quotes could retreat to 1.16-1.17, which could still happen. Especially since according to the latest CFTC data non-commercial investors have more open positions for USD appreciation than for USD depreciation. As of March 16, the number of net long positions in the USD reached nearly 6,000 contracts. This could mean that for the first time since May 2020, investors are no longer betting so much on a USD decline, which could support the thesis of a corrective USD appreciation this quarter.
Where do such conclusions come from? Well, net long positions consist of long positions and short positions, and their difference is net long positions. Looking at the COT report in detail, we could deduce that it was the short positions that fell faster from 32646 contracts to 20738 contracts than the long positions rose from 23759 contracts to 26575 contracts. Hence, it seems that the current strengthening of the USD may come more from the closing of short positions rather than a new wave of investment in the USD. A further cooling of the market seems to be taking place and then the USD weakening trend may still follow after the correction.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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