COT: Crowded euro long posing a threat to dollar bears

This summary highlights futures positions and changes made by speculators forex, bonds and stocks up until last Tuesday, August 11. A mixed week in terms of market action with another dose of vaccine hopes and better-than-expected economic data supporting a 0.9% rise in the S&P 500 to move within a whisker of its February record.

A 13 bp rise in U.S. 10-year yields and a removal – using Fed Funds futures – of the risk that the Fed will move towards a negative-rate policy, helped trigger profit taking across interest rate sensitive sectors, such as precious metals. The Dollar index rose by 0.3% with a record euro long raising concerns about a correction, not only in forex but also among commodities sensitive to sudden dollar strength.

Speculators increased their short dollar position to a fresh  nine-year high in the week to August 11. The net short against ten IMM currency futures and the Dollar Index rose by 12% to $33 billion, the highest reading since May 2011. The rapid pace of selling has resulted in the dollar short position more than doubling during the past five weeks.

However, drilling into the numbers we are not, as opposed to recent weeks, finding broad selling of the Greenback. The vast majority of the short position is due to a continued expansion of the euro long which last week rose 11% to reach a new record of nearly 200,000 lots or €25 billion. Dollar selling was also seen against Sterling where 11,906 lots of buying lifted the net-short to just 2,821 lots, the least bearish in four months. Additional buying of the Swiss Franc increased the net-long to a nine-year high.

The dollar meanwhile was bought against JPY, CAD and AUD as the contraction in yield spreads and weaker commodities supported short covering in the JPY and additional short-selling of CAD and AUD.