The latest CFTC weekly report on forex futures positioning data shows that US dollar net shorts are at a record, or at the widest since 2021, depending on who you ask. The net short position for the week ending July 18 rose 18% to 568,721 contracts.
That's a remarkable move considering there is no particular catalyst for the dollar and no obvious reason to buy other currencies.
Normally, my inclination is to see this report as a proxy for overall speculative forex positioning in the much-large world of spot and derivatives FX but I might make an exception this time. The positioning data just seems so out-of-whack with what I would expect. If it's legit, it sets up a great opportunity to buy the dollar. The playbook for speculative positioning is to fade it when it gets extreme.
Some analysts are arguing that this is a sign that US inflation is poised to fall back to target. I agree that inflation is coming down but it's coming down everywhere and economic data in Europe is struggling, as shown by today's German and UK PMIs.
Breaking down the position, it's largely against the euro and yen. The latter is the reason why this might be giving off a false signal. The potential for a surprise shift from the Bank of Japan in the next few months (or days) is real and it will lead to a plunge in USD/JPY. It could be that futures traders are using the market to hedge FX risk in that pair in the most-liquid way possible, while minimizing counter-party risk.
The pound position is also crowded with the long-GDP position at a 16-year high. Again, that's something I believe is worth leaning against but at least there's positive potential carry involved, especially on talk of the BOE hiking to 6%.
Overall, this appear to me to be news that's almost too-good-to-be-true but I think it sets up a great spot to buy the dollar as I think this is a false breakdown in the Dollar Index.
