The Currencies Hedge Funds Hate

One of my favorite data sets is the Commitment of Traders figures that the CFTC released each week. It shows us how various types of traders are positioned within various futures markets such as corn, Treasury’s, copper, and multiple currencies. A growing theme recently has been selling of certain major foreign currencies by the Large Trader category, which is often made up of hedge funds.

When studying COT data I primarily look at the Commercial Traders (‘smart money’) and the Large Traders (large hedge funds and institutions). The Small Trader category can be useful when at extreme reads but most of the time it just sits near the zero line so we don’t glean very much from these odd-lot traders.

First up we have the Canadian dollar (FXC). Since mid-2009 Large Traders haven’t spent much time net-short the loonie and typically when they are we have seen the loonie eventually bottom out. Currently we can see that the Commercial Traders are the most net-long they have been in three years while hedge funds and Small Traders are historically extremely net-short.

Second up is the British pound (FXB). Over the last few years it hasn’t been unusual to see Large Traders go back and forward between being net-long and short the Pound. What I find interesting is the magnitude that the Commercial Trades have taken a net-long position, almost to the previous high from mid-2011. Hedge funds are currently net short but not yet to the same degree as in 2011.

The Australian dollar (FXA) is another market that we typically see Large Traders stay net-long. And as of last week they still were but are very close to flipping shorting. We looked at the uptrend in the Australian equities last week, although a shift in the Aussie dollar could create some headwinds for equity bulls.

Risk On
So there they are -- the three currencies that large traders don’t seem to like much right now. However, typically when this rubber band is expanded, in some cases to the current level, we see it relax/consolidate or snap back. This could have been created as part of the risk-on nature the market has adapted. This would make sense considering two of the currencies hedge funds have befriended are the Mexican Peso and the ever-so-popular Japanese Yen. Going forward, if we begin to see strength in the Aussie dollar, the pound or the loonie, we may see a short-squeeze that sends the large traders for the exits.

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