The US dollar has been one of the best currency investments in the last two years, because from the beginning of 2018 to now it has gained about 10 percent in relation to the basket of major currencies, as indicated by the entire US dollar index. However, in the last stage of the upward trend, the index had a fairly big problem with breaking the 100 point barrier, i.e. the highest level since the first half of 2017.
The US dollar index is a weighted geometric, which means of the dollar's value relative to following select currencies: Euro (EUR), 57.6% weight, Japanese Yen (JPY) 13.6% weight, Pound sterling (GBP), 11.9% weight, Canadian dollar (CAD), weight 9.1%, Swedish Krona (SEK), 4.2% weight, Swiss Franc (CHF) 3.6% weight. Therefore, if investors are generally interested in trading for a stronger or weaker dollar, they do not have to choose individual currencies, and may, for example, open positions on the US dollar index futures contract.
Then such open positions on contracts are reported to the CFTC (Commodity Futures Trading Commission) and published in the COT (Commitments of Traders) report. Thanks to this, everyone can find out how financial institutions have positioned themselves, in this case on dollar index futures, within a certain time. These data show that since the end of 2017, non-commercial investors (also known as large speculators) increased their involvement in long positions on DXY futures contracts more than doubled by September 2019. From the initial around 22 thousand contracts, positions increased to 54 thousand over that time. At that time, there was also a peak in the dollar index.
From September 2019, it seems, that we may observe regular profit taking on long positions, as their number has now fallen to around 30,000. This is the lowest level since May 2018. In other words, it seems that those willing to see the continuation of the upward trend on the USD are the least for a year and a half, which may not be beneficial for the dollar, especially if investors start turning their positions back into short positions.
The number of short positions on DXY futures contracts has not changed much since September and fluctuates around 8,000 contracts, previously reaching the lowest value since April 2017. This in turn shows how extreme the market has been approaching the weakening of the dollar until recently. Perhaps this may change in 2020.
Daniel Kostecki, chief analyst at Conotoxia Ltd., a company from the group to which Cinkciarz.pl Sp. z o.o.
The above comment is not a recommendation within the meaning of the Regulation of the Minister of Finance of October 19, 2005. It has been prepared for information purposes and should not be the basis for making investment decisions. Neither the author of the study nor Conotoxia Ltd. are responsible for investment decisions made on the basis of the information contained in this commentary. Copying or reproduction of this document without the written permission of Conotoxia Ltd. is prohibited.
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