USD: highly short-term positions observed in non-commercial accounts

The CFTC (Commodity Future and Trading Commission) publishes TORs (Trader Engagement Report) that reveal the positions of traders in various markets. The reports are closely monitored, especially those that concern the currency exchange market.

Since a broker's forex trading volumes don't reflect the entire market, it is difficult to interpret the positioning in the currency market. This is one of the reasons why VSA (Volume Spread Analysis), a powerful trading tool used in the stock market, isn't quite as effective in the currency exchange market.

A recent CFTC report on the DXY (Dollar Index) observes the largest non-trading position of the dollar index in the last 8 years. What does this mean?

Interpretation of CFTC Non-Commercial Reports

First of all, what is the DXY index? Well, basically it reflects the evolution of the USD against a basket of currencies, each with a different weight: EUR (58%), JPY (14%), GBP (12%), CAD (8%), the Swedish crown (4%) and the Swiss franc (4%). The value of the DXY is the weighted average of the value of the USD vs these other currencies.

Second, we need to understand how the CFTC classifies non-commercial investors. According to its rules, a non-commercial investor is an investor who does not take delivery of the futures contract and has no other interest than to speculate on market movements. This category includes not only individual traders, but also large banks and hedge funds.

Returning to the recent report showing extreme positioning on the short side of the DXY for non-commercial investors, the signal is bearish. This is not only the small traders who are generally on the wrong side of the market, but also professional traders and investors who have access to more resources and better research to support their views.

So is the DXY doomed? Maybe, but the trick is to examine its composition and determine what can cause such a decline in the DXY? The simplest answer is that the EUR/USD continues to rise. As the EUR accounts for more than half of the weight of the DXY, a strong bullish trend would explain the non-commercial positioning.

But it might not just be the EUR/USD's rise, but rather the USD/JPY that is falling further. Or even that the GBP/USD is rising aggressively.

Overall, the signal may be bearish on the USD, but we still need to be very diligent to find the right horse and bet on it.