Head of Commodity Strategy
Summary: The technical breakouts in both euro and Japanese yen had speculators rushing into short positions in the week to February 25. Just before the emerging market turmoil triggered deleveraging across all markets. As a result the 49% spike in the dollar long, most noticeable against the euro and Japanese yen was left exposed in the days that followed.
Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
The weekly flows in FX up until February 25 were heavily geared towards continued and accelerated selling of euros and Japanese yen. This in response to what later proved to be potential false breakouts in both. The emerging risk aversion and deleveraging caused by the slump in U.S. stocks and spike in the VIX helped support short-covering. And the elevated size of the just increased short positions helps to explain the rallies seen in both EURUSD and JPY during the remainder of the week.
Overall the speculative dollar long against ten IMM currency futures and the Dollar Index jumped by 49% to $20.6 billion, the most since December 11. As per the table below we find that the selling was broad-based but with EUR and JPY – as mentioned - seeing the bulk of the selling.
Bearish euro bets jumped by one-quarter to 114k lots, a 38-month high and the equivalent of $15.5 billion. The breaking of a five-year downtrend in USDJPY on the move above 110 helped drive a doubling of the net-short to a nine-month high at 29k lots ($6.4 billion).
Leveraged funds were strong buyers at the front and the back of the U.S. yield curve. Overall the total short exposure was reduced by a significant $21 million per basis point (DV01). The S&P net short was reduced by 38% while the speculative short in the Cboe VIX contract was cut by 40% to 53k lots, a six month low.
