Currency speculators boosted their net long euro position to a record high and lifted short dollar contracts to a seven-month peak in the week to December 5, data from the Commodity Futures Trading Commission showed on Friday.
Speculators on the CME's International Money Market currency futures raised their net long euro position to 98,265 contracts, an all-time peak, from 89,594 contracts the previous week. The net short dollar position, meanwhile, rose to $24.3 billion, up from short contracts of $21.3 billion the week before, according to Reuters computations using contracts in the yen, euro, Swiss franc, British pound, Australian, and Canadian dollars. Analysts said this week's net short dollar contracts were the largest since May 2006.
"No big surprise here given the continued negative dollar sentiment in the market," said David Powell, currency strategist at IDEAglobal in New York. "The dollar-bearish sentiment has been largely exacerbated by the contraction in a key US manufacturing survey last week," he added. That data's weakness raised concerns about a possible hard landing scenario for the US economy and reinforced expectations of a cut in benchmark interest rates next year.
However, Powell said he would be surprised if the level of net long euro contracts remained at such elevated levels next week given how extreme the market's positioning has been. He anticipates a minor pullback in the euro's price against the dollar in the short term. The CFTC data on speculative positioning are often used by analysts as an indicator of future market direction.
For example, extreme net short or long positions in a currency often suggest a reversal in price action is imminent because dealers might be uneasy about keeping such a large position open.
The speculative community further pared their net short yen position to 23,537 from the previous week's 41,958 contracts, suggesting continued unwinding of carry trades that have been so successful this year. Carry trades involve borrowing low-yielding currencies such as the yen and Swiss franc and lending currencies with higher interest rates.
This week's net short yen contracts were the smallest since July 2006. Speculators also halved their net short Swiss franc contracts to 6,468 contracts, from last week's shorts of 13,903. The Swiss National Bank is widely expected to raise interest rates by 25 basis points at its next policy meeting on December 14. Markets are also pricing in another rate increase by the SNB in March 2007. Sterling net long contracts, meanwhile fell slightly to 75,832 in the latest week, down from 80,626 previously.
IMM data reflect non-commercial or speculative accounts. The non-commercial positioning is of particular interest as it provides a proxy for broader speculative activity.