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Ahead of this afternoon’s Federal Reserve meeting, we note that speculators have sharply reduced short positions against the dollar in the last month, with the capitulation coming after a series of stronger-than-expected data releases widened expected performance gaps between the United States and the rest of the global economy. Friday’s numbers from the Commodity Futures Trading Commission showed the net dollar position on the verge of flipping into bullish territory, with long trades on the euro tumbling sharply relative to levels earlier in the year. The net non-commercial futures position on the dollar against the G10 currencies plus the Mexican peso fell to roughly $1.9 billion, down from more than $20 billion in July. 

A weekly-updated version of this chart is hosted on our US markets page here 

You might think this means that speculative fervour could help the dollar power higher on a more hawkish outlook from the Fed – but we note that speculators (like foreign exchange strategists) are notorious for getting it wrong. Although there is some evidence to suggest that extreme positioning can exacerbate volatility around unexpected events, studies have shown that exchange rate moves generally drive the speculative herd, not the other way around. Real-money flows from commercial participants – like you, our readers – and from large asset managers remain the biggest drivers in currency markets. 

So if the bulls are running, it might be best to get out of the way, not join them. 

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