The UK voted to leave the EU. The German and Japanese yield curve is negative out through 15 years. The entire Swiss curve has negative yields. There is little doubt that the US economy was recovering from a soft six-month stretch even before the recent string of data. Even then, speculators in the futures market mostly added to foreign currency exposures.
The CFTC reporting week ending June 21 covers the day FOMC and BOJ meetings and ends two days before the UK referendum. The overarching theme was the reduction of exposure. This is not measured by net positions but by gross positions.
Of the eight currencies we track, six saw a reduction of gross long positions and a six saw a reduction in the gross short positions. Five of the eight currencies showed a decline in both long and short positions.
In the days ahead of the murder of Jo Cox, a UK member of parliament, apparently for her support for remaining in the EU, speculators in the futures market scooped up sterling. They added 25.4k sterling contracts to lift the gross long position to 61.7k contracts. This is the second largest long speculative position after the mid-March holdings of 62.9k long contracts.
In the first week of June, which featured both the largely uneventful ECB meeting, and the surprisingly weak US jobs data through the first couple sessions this week saw speculators make several significant adjustments to their positions.
Overall, the adjustment was in favor of the US dollar and US Treasuries. Of note, the dollar tended to weaken in the spot market over in the CFTC Commitment of Traders reporting week ending June 7. After the end of the report period, the dollar recovered.
Even recognizing a holiday-short week, speculative position adjustments were minor in the days before the ECB meeting and the US jobs report. There were no gross position adjustments that met the 10k contract threshold.
The largest gross position adjustment was the liquidation of 7.8k gross long yen contracts. This leave 47.0k long contracts, which is the second largest gross long speculative position after the euro where the speculative gross long position stood at 98.2k contracts (after increasing by 4.3k contracts in the reporting week ending May 31.
Many market participants began talking as if it were nearly a done deal that the UK will vote to stay in the EU. It is as if Winston Churchill’s witticism that Americans can be counted on to do the right thing after they have exhausted the alternatives really applied to the UK.
We noted that despite sterling’s higher trend, the options market, where contingent risk is best expressed, was still showing high levels of stress and uncertainty. Insurance against Brexitis still being sought and investors were paying up for it.
There were only two significant speculative position adjustments in the latest CFTC reporting week ending May 24. Speculators liquidated 31.4k gross long yen contracts, leaving the bulls with 54.8k contracts. It is the largest weekly adjustment since last September.
Speculators have not been particularly keen to pick a yen top. The gross short position rose by 5.5k contracts to 32.7k, and only 2k contracts on the month, while the yen has weakened 3.5% in the spot market
Speculative positioning in the currency futures began to adjust before the latest signals from the Federal Reserve about the prospects for a summer hike and the widening of interest rate differentials. In the CFTC reporting week ending May 17, the day before the FOMC minutes were released speculators mostly reduced gross long currency positions and added to gross short positions.
The US dollar staged an impressive reversal against many of the major foreign currencies on May 3. In the following week, speculators in the currency futures market made significant adjustment in their holdings. We identified a change in the gross position in the currency futures of 10k contracts or more to be significant.
Speculators in the futures market continued to pare short foreign currency positions but were cautious about expanding long positions in the CFTC reporting week ending May 3. In fact, two of the three largest adjustments were the cutting of gross long Japanese yen and Australian dollar positions.
