Weekly CFTC COT Forex Positioning: Yen Still in Play?

The latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost some ground against almost all of its forex rivals while being particularly vulnerable to the Japanese yen. Moreover, calculations done by Reuters show that the value of net long positions on the Greenback for the week ending on January 5, 2016 was reduced from $31.80 billion to$28.78 billion, which is a two-month low.

Keep in mind that these numbers show the net positioning of non-commercial traders against the U.S. dollar. If you’re feeling overwhelmed by all these figures, you might need to review our School of Pipsology lesson on How to Gauge Market Sentiment Using the COT Report in order to learn how to pinpoint potential forex market reversals.

CFTC COT Forex Positioning (Jan. 5, 2015)

CFTC COT Forex Positioning (Jan. 5, 2015)

Lemme break down the latest numbers for y’all:

  • The Greenback lost some ground to almost all of its forex rivals, with the euro being the sole exception, but net absolute change in euro positioning was so small that it was essentially unchanged.
  • The Japanese yen still seems to be in play since it had the largest net change in positioning, just like in the previous week. This time, however, the Japanese yen was finally able to win out against the U.S. dollar, thanks to speculators pumping up their yen longs from 45,008 contracts to 67,471.
  • The Swissy continued to win out against the U.S. dollar, and even got a small increase in net bullish bias, but it the increase was so small that positioning on the Swissy was essentially unchanged.
  • The Kiwi joined the Japanese yen and the Swissy in the winner’s circle due mostly to an increase in Kiwi longs from 14,971 contracts to 16,842.
  • Non-commercial forex traders were also less bearish on the other comdolls (Aussie and Loonie) since they trimmed their net bearish bets on both currencies.
  • Net bearish bets on the pound only saw a modest increase, but both pound bulls and pound bears were actually cutting down on their positions substantially. Long contracts on the pound was reduced from 47,598 to 40,898 while short contracts were slashed from 108,385 to 101,028.

Demand for the Greenback continued to slide a bit during the week ending on Jan. 5, 2016. This was likely due to continuing doubts on the sustainability of the U.S. Fed’s tightening cycle and speculation that the Jan.8 NFP report will be a disappointment (it wasn’t) given that U.S. economic reports that came out during this period were mostly poor. ISM manufacturing PMI for December, in particular, came in worse-than-expected, (48.2 vs. 49.1 expected, 48.6 previous), with the employment sub-index printing a drop from 51.3 to 48.1.

As for the Greenback’s forex rivals, capital flows from global equities to the safe-haven currencies help to account for the overwhelming demand for the yen and the Swissy’s steadfastness against the Greenback. Capital outflows from European equities to the low-yielding euro also help to explain why net absolute change in euro positioning was essentially unchanged.

What was driving capital flows, you ask? Well, Pip Diddy noted in his most recent Top Forex Market Movers of the Week that global equities were routed during the trading week ending on Jan. 8 due to severe risk aversion over China’s stock market meltdown, which started on Jan. 4.

Strangely enough, demand for the higher-yielding Kiwi and the Aussie picked up despite jitters over China. This was likely because of improvements in the officially-sanctioned manufacturing (49.7 vs. 49.6 previous) and non-manufacturing (54.4 vs. 53.6 previous) PMI readings from the National Bureau of Statistics of China, which preceded the poor PMI readings from Caixin/Markit by over a week.

Incidentally, Forex Gump noted in one of his more recent write-ups that the poor Caixin/Markit manufacturing PMI reading was the most likely catalysts that triggered the Chinese stock market slump.

Anyhow, the Chinese stock market rout only became more apparent by Jan.6, which is beyond the reporting period of the most recent COT report. But given the broad-based Kiwi and Aussie weakness last week, we can probably expect the upcoming COT report to show an increase in bearish bets for the two aforementioned currencies.

Got any other conclusions you can draw from this latest COT Report? Feel free to share your thoughts in the comments section or if you’re looking for further discussion, community member ForExchange has a lively thread called Trading based on Market Sentiment in the forums awaiting your participation.