Weekly CFTC COT Forex Positioning: Pound in Play?

According to calculations done by Reuters, net long positions on the U.S. dollar slid a bit for the second straight week from $6.88 billion to $6.59 billion during the week ending on March 15, 2016. Moreover, the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback had a mixed performance, but lost a very significant chunk to the pound while gaining some headway against the Japanese yen and the Aussie.

Keep in mind that the numbers below show the net positioning of non-commercial forex 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 (Mar. 15, 2016)

CFTC COT Forex Positioning (Mar. 15, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback lost some ground against most of its forex rivals, and there are now four currencies that are winning outright against the Greenback.
  • The yen still has a large lead against the Greenback, but net long positions on the yen was significantly decreased by slashing bullish bets on the yen from 93,867 contracts to 79,426 while simultaneously pumping up bearish bets from 29,534 contracts to 33,937.
  • Net long positions on the Aussie were also cut down, but speculative forex traders were actually unwinding on both their long and short positions. It just so happens that more Aussie bulls than Aussie bears were exiting their positions.
  • The Swissy is now part of the winner’s circle after seven straight weeks of losing out to the Greenback. The Swissy’s victory was due to long positions on the Swissy being increased from 19,735 contacts to 22,619 while short bets were pared from 19,864 contracts to 17,357.
  • The Kiwi is now also winning out against the Greenback after eight weeks, but this was due to more Kiwi bears liquidating their positions than Kiwi bulls.
  • The pound had the biggest net change in positioning, thanks to a very drastic increase in bullish pound bets from 29,364 contracts to 62,876 , as well as a small decrease in pound shorts from 78,369 contracts to 76,495.
  • Non-commercial forex traders are still net bearish on the Loonie, but they trimmed their short bets on the Loonie from 56,331 contracts to 48,410.
  • Large speculators appear to have increased their bearish bias on the euro, but a closer look at the positioning shows that both euro bulls and euro bears were actually cutting down their positions, with more bulls abandoning ship than bears.

The lack of demand for the Greenback during the week ending on March 15, 2016 was very likely due to uncertainty on the U.S. Fed’s forward guidance for the March 16 FOMC statement, given that the most recent NFP report was a mixed bag of nuts, with wages declining by 0.1% instead of advancing by 0.2% being a sore spot, not to mention other disappointing economic reports such as retail sales declining by 0.1% in January, with the 0.2% previous increase being downgraded to a 0.4% decline to boot.

Of course, we now know what happened during the FOMC policy decision and statement, and you can read Forex Gump’s write-up here if you somehow missed it.

As for the other currencies, the significant unwinding of long bets on the Japanese yen was most likely due to profit-taking in the aftermath of the BOJ’s March 15 monetary policy decision, which caused the Nikkei to plunge lower while making the yen stronger.

In the said decision, the BOJ decided to maintain its benchmark rate at -0.1% and its monetary base target at about ¥80 trillion despite calls for more stimulus given the current state of the Japanese economy and the stronger yen. In addition, the BOJ heavily implied a gloomier near-term outlook, saying that “sluggishness is expected to remain in exports and production for the time being,” which is probably why we also saw a small increase in short yen bets.

Moving on, the decrease in net bullish bets on the Aussie was probably because of the the string of disappointing economic reports for Australia and the March 15 release of the RBA Meeting Minutes for the March 1 RBA policy decision. The minutes still presented a rather upbeat outlook, but the minutes also warned that “continued low inflation would provide scope to ease monetary policy further.” That’s not really new, though, since that was also mentioned in RBA Governor Glenn Stevens’ press release, but traders probably didn’t focus on that at the time since the Aussie was dominating most of its forex rivals back then.

As for the drastic increase in bullish bets on the pound, that was probably because of a slew of mostly positive economic reports. Manufacturing production in the U.K., for example, was up by 0.7% in January, breaking three straight months of declines. The positive reports then possibly fueled speculation that the BOE will present a more upbeat tone for the Mach 17 MPC rate decision and Minutes, but we now know that BOE officials had a more balanced tone.

Regarding the Loonie and Kiwi, positioning on the two comdolls was likely being influenced more by Greenback weakness, but both currencies got some buyers, which is weird because commodities were mostly on the defensive during the period.

Not as weird is the positioning on the euro. The large decline in euro long positions accompanied by a reduction in short euro bets was likely due to euro bulls taking some profits off the table and euro bears getting out, thanks to the ECB’s March 10 monetary policy decision wherein ECB President Mario Draghi said that further rate cuts may be no longer be necessary.

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.