The continued build of short currency futures positions characterizes the changes in the speculative positioning. All the currency futures we track saw an increase in gross short positions. This is what drove the large net short positions. One thing this means is that late shorts are in weak hands, and as we have seen in the Australian dollar, vulnerable to a squeeze.
The US dollar broadly consolidated its recent gains over the past week. Data and officials mostly confirmed what most investors had already anticipated. The Federal Reserve is most likely to hike rates in the middle of December. The ECB will most likely ease policy further just shy of two weeks before the Fed meets. The Bank of Japan is in no hurry to step up its already aggressive asset purchase program.
In the Commitment of Traders reporting week ending November 10 covers the few days before the US employment data and a few days after. Speculative participants made five significant (10k contracts or more) adjustments to gross positions in the currency futures. The prior reporting period saw only three significant adjustments, and in growing gross short euro, yen, and Swiss franc positions.
After nearly two years of lobbying, the Chinese government finally learned this week that its currency would be part of the International Monetary Fund’s special group of world currencies. Its currency, the renminbi, will now join a short list of the world’s top currencies in the International Monetary Fund’s basket of top currencies that also include the U.S. dollar, the Euro, the British pound, and the Japanese Yen.
This Great Graphic, created on Bloomberg, shows the recent price action of the Australian dollar. For the past month, corrective upticks have held a trendline. It comes in near $0.7150 today and a little below $0.7115 by the end of the week.
The latest leg down for the euro began in mid-October when the single currency met a wall of sellers in front of $1.15. Draghi’s dovishness at the press conference following the October 22 ECB meeting sent the euro toward $1.11. The contrasting hawkishness of the Federal Reserve, where the FOMC statement on October 28 specifically cited the next meeting, pushed the euro to $1.09.
The IMF will decide this month whether to make the Chinese renminbi the fifth international reserve currency. For the euro, that would not be a win or lose game.
Behind the facade, there has been much debate about the inclusion of the Chinese currency – the renminbi (RMB) – as the fifth international reserve currency. Initially, Beijing hoped that, after the International Monetary Fund’s (IMF) long-anticipated November meeting, the RMB could become part of the international currency basket by 1 January 2016.
American banks are holding fewer bonds on fears that the market will continue to decline, while mortgage activity falls and retail sales decline.
There were three significant speculative gross position adjustment among the currency futures in the Commitment of Traders reporting week ending November 3. They were all expanding the gross short positions. Speculators added 30.9k contracts to lift the gross short euro position to 207.2k. It has risen by 69k contracts in the past two weeks.
Sometimes the mountain peak is clearer from the valley than from the summit. It may be easier to understand the changes in China’s currency regime if we take a step away and try to look at the big picture. To find our path we need to clear away some undergrowth that is distracting us from rigorous analysis.
With China’s economy slowing and exports weak, a devaluation could be a way to restore economic vigor. Many accounts in the western financial press tried placing the depreciation of the yuan in this context, but it is mistaken.
