Position-squaring benefits the dollar

The latest IMM data covers the week from 8 to 15 December.

Short dollar positions have been unwound at an impressive pace ahead of year-end. From being very short the dollar only a few weeks ago, speculative investors are now close to being square - and have even turned net long the dollar against the euro.

Assuming that speculative IMM positions are representative of overall positions on the currency market, the latest data suggests, however, that position squaring ahead of year-end is likely to have been almost completed. This in turn suggests that the December dollar rebound should lose momentum and that the better part of the decline in EUR/USD is over - even as the positive USD sentiment is likely to be sustained in the short term.

Indeed, we do not expect significant long dollar positions to be built up in the market, as this appears premature from a fundamental perspective. That is, we do not expect the market to become very long the dollar, as long as global economic and liquidity conditions promise further upside in risky assets and as long as the Federal Reserve maintains its very dovish stance.

Dollar shorts have not only been unwound against the euro, but also against JPY and CHF, where speculative investors are now close to neutral. Meanwhile, net short GBP positions have been built further to reach 32.5% of open interest - somewhat crowded, but still far from the levels seen in mid-October.

The IMM data

The IMM data is part of the Commitments of Traders (COT) reports published by the U.S. Commodity Futures Trading Commission (CFTC). The IMM data provides a breakdown of each Tuesday's open futures positions on the International Money Market (IMM) a division of the Chicago Mercantile Exchange. All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z). A trader may be classified as a commercial trader in some commodities and as a noncommercial trader in other commodities

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