Weekly CFTC COT Forex Positioning: Euro Bulls Coming Out to Play?

Calculations done by Reuters show that speculators increased the value of their net bearish bets on the Greenback for the third consecutive week, this time from $4.19 billion to $6.46 billion, but the latest Commitments of Traders forex positioning report from the CFTC reveals that the Greenback had a more mixed performance, although it lost a large chunk of ground to the euro.

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 (May 3, 2016)

CFTC COT Forex Positioning (May 3, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback lost the most ground to the euro, thanks to the number of long contracts on the euro suddenly surging from 99,072 to 113,034 while euro shorts were pared a bit from 138.739 contracts to 136,653.
  • Non-commercial forex traders further reduced their net bearish bias on the pound by increasing their pound longs from 40,431 contracts tpo 46,105 while trimming their shorts from 89,100 contracts to 86,513.
  • Net bullish bets on the yen got reduced for the second consecutive week, although a closer look at how positioning went down shows that both yen longs and yen shorts were drastically reducing their positions, with the substantial reduction in yen longs from 97,470 contracts to 85,627 easily overwhelming the reduction in yen shorts from 30,972 to 24,106.
  • The same positioning activity was happening in the Aussie, with Aussie bulls decreasing their bets from 109,932 contracts to 99,024 while Aussie bears decreased theirs from  50,392 to 46,629.
  • The reduction in bet bearish positioning on the Swissy was mostly due to Swissy longs getting slashed from 23,990 contracts to 21,297.
  • Large speculators increased their net bullish bets on the Loonie by increasing their pumping up their long bets from 37,104 contracts to 39,840 while simultaneously reducing their short bets on the Loonie from 25,105 contracts to 20,897.
  • The same positioning activity can be observed on the Kiwi, albeit to a lesser extent, hence the smaller net absolute change in positioning.

The slump in Greenback demand has been persisting for the ninth week running, and speculators have been net bearish on the Greenback for three straight weeks, as of the week ending on May 3, 2016. The Greenback closed higher against all of its forex rivals by May 6, however, so the large non-commercial forex traders who increased their bearish bets on the Greenback probably got burned.

Anyhow, the most recent bout of Greenback weakness was likely due to the April 27 FOMC statement since the Fed had a more or less neutral tone and refrained from giving forward guidance on when the next rate hike would be.

Another likely factor for the slide in Greenback demand was the April 28 release of the U.S. GDP report since it revealed that U.S. economic growth slowed down in Q1 2016, growing only by 0.5% quarter-on-quarter, which is a two-year low and significantly weaker than Q4 2015’s 1.4% expansion. This likely caused large speculators to think that a rate hike is even more unlikely.

Moving on, the Greenback lost a substantial chunk of ground to the euro. This was likely due to the prevalence of risk aversion at the time, which sent capital flows towards the lower-yielding euro, as well as remarks by ECB President Mario Draghi, such as his April 27 statement that the ECB’s “policy is working, but we must be patient” and his May 2 statement that low interest rates are not a problem, but that they are “the symptom of an underlying problem” in fiscal policy. Such statements probably fueled speculation that the ECB won’t be easing again anytime soon.

The prevalence of risk aversion should have fueled demand for the other low-yielding safe-haven currencies, namely the Swissy and yen, but the big players seem to have favored the low-yielding euro while cutting down on their net bullish positions on the Swissy and the yen. This positioning activity on the Swissy was likely due to SNB Chairman Thomas Jordan’s May 2 Speech wherein he reiterated that the Swissy was still “significantly overvalued” and that the SNB still has its eye on the Swissy when formulating its monetary policy. Also, Jordan said that “The SNB will continue to make the most of the latitude afforded by its monetary sovereignty to respond pragmatically to the challenges ahead,” which is to say that the SNB will likely continue to weaken the Swissy.

As for the yen, the reduction in net bullish bias on the yen despite the risk-off environment at the time was likely due to yen shorts abandoning ship after the BOJ decided to sit on its hands during its April 28 monetary policy decision and yen bulls getting spooked by Japanese Prime Minister Shinzo Abe’s statement that sudden forex moves were undesirable.

With regard to the Kiwi and the Loonie, higher demand for the two comdolls was likely because the broad-based commodities rout didn’t become very apparent yet by May 3. Net bullish bets on the Aussie took a hit, however, and that was likely because of the “surprise” RBA rate cut.

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.