Weekly CFTC COT Forex Positioning: Euro in Play?

The latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback repeated last week’s performance by taking ground from the pound, while getting pushed back by its other forex rivals, with the euro pushing back the hardest. In addition, calculations done by Reuters, show that net long positions on the U.S. dollar fell for the fifth consecutive week to $2.15 billion from $4.65 billion, which is the lowest on record since late March 2014.

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 (Apr. 5, 2016)

CFTC COT Forex Positioning (Apr. 5, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback had a repeat of the previous week’s performance by taking ground from the pound while losing ground to everything else.
  • Pound shorts ramped up their positions from 78,954 contracts to 86,080.
  • There was a significant net change in positioning on the euro due to euro bulls increasing their positions from 93,726 contracts to 98,014 while euro shorts pared their bets from 157,357 contracts to 151,501.
  • Net bullish bets on the yen increased, but a look at the details of how the positioning went down show that both yen bulls and yen bears were pumping up their positions. It just so happens that there were more bulls than bears.
  • The opposite was happening on the Swissy since Swissy bulls and Swissy bears were cutting back on their positions. More bears were reducing their positions, though, which is why the net bullish bias on the Swissy increased.
  • Large speculators increased their net bullish bets on the Aussie mainly by reducing their short bets on the Aussie from 53,610 contracts to 51,389.
  • They were doing the same (to a lesser extent) on the Kiwi.
  • The Loonie finally (and just barely) joined the winners’ circle, thanks to non-commercial forex trades substantially reducing their bearish bets on the Loonie from 34,326 contracts to 29,468. They also increased their bullish bets on the Loonie from 28,146 contracts to 29,565.

Demand for the Greenback continued to slide during the week ending on April 5, 2016. This was was very likely due to lingering concerns over Fed Chairperson Janet Yellen’s March 29 speech, which was rather dovish, reinforcing the idea that the Fed’s path to hiking rates would be much slower than was projected when the Fed raised the Federal funds rate back in December 2015.

Other likely reasons for the slide in Greenback demand include, among other things, preemptive positioning ahead of the April 6 release of the March FOMC meeting minutes. If you can still remember, Fed officials became very cautious during the March 16 FOMC statement, so much so that they downgraded their economic forecasts and even reduced the projected rate hikes in 2016 from up to four to only two (at most). Given that backdrop, it was to be expected that the contents of the FOMC meeting minutes were gonna be dovish (and we now know that it was).

The fact that the U.S. was getting slammed with disappointing economic reports during the week ending on April 5, 2016 probably helped to squash demand for the Greenback as well. U.S. factory orders decreased by 1.7% in February (+1.2% previous), for example. The $47.1 billion trade deficit in February (-$45.9 billion previous) was also the widest in six months. And while the March NFP report looked awesome on the surface, it begins to lose its awesomeness (if there is such a word) when you look at the details, especially the 29K loss in manufacturing jobs, which was the biggest since 2009.

Like last week, the Greenback’s own weakness was likely the reason why the Greenback’s forex rivals saw a net increase in bullish bets. After all, many of the Greenback’s rivals were able to advance against the Greenback mainly due to non-commercial forex traders trimming their short bets on said rivals, namely the Aussie, the Loonie, the Kiwi, and the Swissy.

One noticeable deviation to this was the euro since the reduction in bearish bets on the euro was accompanied by a large buildup of long bets on the euro. The increase in bullish bets on the euro was very likely due to the prevalence of risk aversion during the period since that drives up demand for lower-yielding currencies like the euro.

Another noteworthy deviant was the yen since both yen shorts and yen longs were increasing their positions. The increase in yen longs was likely due to the prevalence of risk aversion, as I already noted above. The increase in yen shorts, meanwhile, was likely due to lots and lots of rumors about additional stimulus like this one and this one.

As for the pound, it continued to lose out to the Greenback. Aside from continuing softness due to the looming Brexit referendum, the U.K. also got hit by negative reports during the period, with demand for the pound likely getting hit as well.

For starters,  the U.K. printed a current account deficit of £32.7 billion in Q4, which is much bigger than the expected £21.2 billion deficit. Moreover, the Q4 deficit amounted to around 7% of gross GDP at current market prices, which is “the largest proportion since quarterly records began in 1955,” according to the report from the Office for National Statistics. And while the Markit/CIPS U.K. manufacturing PMI reading came in at  51.0, it missed the expected reading 51.2 expected, not to mention the fact that commentary from the report was rather gloomy. And the same can be said for both the U.K. services PMI and the U.K. construction PMI.

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.

  • Jason

    What is it about this report the makes the EURUSD in play as opposed to its previous situation? There are so many things that can be charted for timing purposes from the COT for a long term trade. Net positions, commercial and non commercial difference, change in net positions, etc!

    • Heya!

      I wasn’t really making a statement or a recommendation that the euro was in play specifically for a long-term trade. I was asking a question, hence the question mark at the end. As for the reasons why I asked that question, they’re already in the write-up.

      To reiterate:

      1. The euro had the largest net absolute change in positioning versus the dollar, which is why I highlighted it in the table.

      2. The change in positioning was due to non-commercial traders reducing their short positions on the euro while also increasing their long positions.

      3. Trimming of short positions occurred in many currencies, reflecting weaker bullish sentiment on the dollar, so nothing surprising there.

      4. However, speculators also ramped up their long bets on the euro by a lot. Only the yen had a larger increase in long contracts.

      I hope that clarified things a bit.