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Institutional positioning in the latest CFTC Commitments of Traders report suggests the USD bias towards strength and weakness of the yen. Leveraged funds and asset managers report net-long positions in the US dollar at the highest levels in several months, driven by recent economic data and safe-haven flows. Meanwhile, the euro longs are quickly unwinding to reach net-short levels, while the Japanese yen is net-short funds unwinding massive positioning from asset managers due to the persistent yield differential. The British pound shows a mixed reversal of extremes as asset managers register net-short positions at record levels, while the Aussie dollar is broadly viewed as a carry trade currency and net-long. The commodity currencies are mixed, with the Canadian dollar viewed as a short and the Aussie viewed as a long.
The retail broker positioning provides a contrarian view to the institutional positioning. The aggregated positioning of the clients suggests that they are generally net-long the euro and pound while being net-short the yen and the Canadian dollar. This is a conflicting position to the institutional positioning and suggests that the crowded trades of the latter may be vulnerable to reversals. The most interesting observations are made in the EUR/USD and USD/JPY pairs, where the retail positioning is at odds with the institutional positioning. In the former, the clients are buying weakness in the euro against the dollar, while the institutions are net-long the euro and unwinding longs. In the latter, the retail positioning suggests that clients are trying to short the USD/JPY while the institutions are net-short the yen and long the dollar.
The main takeaway from the report is that the crowded USD longs and yen shorts leave the market vulnerable to sharp reversals. If the dovish turn in the fed funds or geopolitical developments cause a short-covering rally in the euro and yen, the retail clients who took the opposite positions may experience significant losses.
