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Sea Change in Dollar Specs


If it can't rally when the smart money bets on it, then what happens when...


One of the themes several of the other Professors like to touch on is the interplay between not only the four metrics (fundamentals, technicals, structurals and psychology), but also the relationship between various asset classes.

One primary focus has been the US Dollar and its likelihood of influencing future moves in equity land.

To that end, one development that's popped up recently is the swift change in futures positions in the Dollar and other currencies in the past few weeks. This summer, my firm was seeing (trend-following) speculators largely short the dollar, which per usual didn't work out so well for them.

Now we're seeing something of a sea change as these traders gear up for a Dollar rally. During the summer months, large speculators were holding less than 25% of all outstanding long positions in the Dollar. As of last Tuesday, they were holding 67% - one of the higher percentages in history and one of the more truly extreme readings in the past five years.

In the chart below, I show a little different take on the data. The chart shows commercial trader (aka "smart money") net positions in currencies other than the US Dollar, weighted by their importance on a trade-weighted basis.

We can see that lately the positions have jumped against the greenback. What this means is that smart-money traders have backed off shorting foreign currency futures and instead have become more interested in shorting the Dollar. This is in stark contrast to the summer, when commercials were betting heavily against foreign currencies.

This particular view of the data isn't yet extreme – it's about in the middle of its range for the past couple of years – but I would certainly take it as less of a supporting factor for the Dollar than it was a few months ago. This is especially the case since the Dollar's rally has been so anemic compared to past rallies when we've seen an extreme in the trade-weighted commercial futures positions.
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