In this week’s eventful COT report, there are new extremes in long British pound and short Australian dollar positions. Short Swiss franc net positions are no longer at an extreme, while long crude oil remains a consensus long position in the speculator community. This is shown below:

CFTC COT (futures & options combined) – December 19, 2017

Source: CFTC, MarketsNow

Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical trailing 1-year and 3-year trends.

The biggest changes in net positions this week include rising British pound positions and falling Australian dollar, euro and Swiss franc positions. Long British pounds is now two standard deviations higher than its 3-year trailing average as speculators believe more Brexit negotiation breakthroughs are likely. We have argued in the past that markets are overly optimistic regarding Brexit in the medium-term, especially given the EU’s offer of a “Canada-style” trade deal.

Speculator interest in buying euros is now falling, as EUR/USD has been trading in a narrow channel between 1.17 and 1.19 for the past four weeks. Last week, long euro positions were fairly close to extremes. Lastly, speculators are also taking profits on short Swiss franc positions, as EUR/CHF trades above 1.17 for the first time since the Swiss National Bank broke the peg in 2015.

Elevated net positions drive AUD trading

Looking at Australian dollar net positions in recent history, speculators have mostly been long the currency since February 2016. Given Australia’s reliance on Chinese commodity exports, the currency has been strengthening alongside the rising fortunes of the Chinese economy since early 2016. This is shown below:

Bullish extremes foreshadow sell-offs in the Australian dollar

Source: CFTC, MarketsNow

Bullish net positions were at extremes in late April 2016 (3-year z-score = 2.5x) and again in late September 2017 (3-year z-score = 2.1x). In both cases, the Australian dollar weakened sharply after long positions became too crowded. Looking at AUD/USD, the pair fell from above 0.77 in late April 2017 down to 0.71 by late May. After trading near 0.79 in late September 2017, AUD/USD is currently around 0.77.