FX Positioning: First (Timid) Signs Of USD Short-Squeeze

CFTC data on speculative positions shows some signs of dollar shorts being unwound as GBP, JPY, AUD, and NZD all saw their net positioning drop in the week ending 26 January. That said, EUR/USD still shows no evidence of a correction in its overstretched net long positions.

USD positioning starting to recover

After hitting a record low at -19.2% of open interest, the USD aggregate positioning versus reported G10 (i.e. G9 excluding Norway's krone and Sweden's krona) slightly rebounded in the week 20-26 January, moving to 18.3% of open interest. We have been highlighting over the past few weeks how CFTC positioning data has been more and more disconnected from actual market dynamics as dollar shorts increased despite the greenback’s rebound in spot.

Source: CFTC, Macrobond, ING 

We were expecting to see some kind of short squeeze in the dollar, so the dynamics shown in the week ending 26 January are not surprising. That said, the divergence with market dynamics persists. And not only because the dollar’s recovery in positioning has been rather marginal, but also because the currencies that showed the largest positioning contraction were the British pound and New Zealand dollar which have been the best G10 performing currencies (among those reported by CFTC) in the last month (both gained vs USD) and both rallied in the week 20-26 January.

It’s been often the case over the past year that positioning data published by CFTC showed some lag to the actual market movements, so we could still see some realignment with the market in the coming reports. For now, it is important to highlight how the picture provided by CFTC data is probably not a highly reliable indicator of market sentiment on G10 currencies. After all, it must be remembered that the report summarises the positions of a rather small segment of the market - mainly short-term speculators - and this may result in such divergences with actual market dynamics.

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