Weekly CFTC COT Forex Positioning: Pound and Euro Bears Came Out to Play

According to calculations done by Reuters, the value of net bullish bets on the Greenback surged from $4.86 billion to $11.30 billion during the week ending on June 7, 2016. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback took large chunks of ground from the pound and 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 (June 7, 2016)

CFTC COT Forex Positioning (June 7, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback won out against most of its forex rivals, excepting the yen and the Kiwi.
  • After six weeks of trimming their net bullish bets on the yen, non-commercial forex traders finally and substantially increased their net bullish bias by pumping up their long positions from 46,964 contracts to 68,237 while paring their shorts from 32,127 to 25,384.
  • Large speculators increased their net bullish bets on the Kiwi for the second week running by increasing their long bets on the Kiwi from 31,919 contracts to 38,562, which was able to offset the increase in Kiwi shorts from 26,415 to 30,026.
  • The pound lost an enormous chunk of ground against the Greenback, mainly due to the number of short bets on the pound surging from 69,397 to 102,636.
  • The euro also lost significantly against the Greenback, thanks to euro longs getting trimmed from 98,128 contracts to 93,492 and euro shorts jumping from 135,872 contracts to 160,604.
  • The Aussie was pushed deeper into bearish territory against the Greenback, thanks mainly to the unwinding of Aussie longs, with long bets on the Aussie falling to 35,406 contracts from 44,560 previous.
  • The Swissy finally lost out against the Greenback after 12 weeks, due primarily  to Swissy shorts increasing from 24,162 contracts to 31,289.
  • Large speculators reduced their net bullish bias on the Loonie by reducing their Loonie longs from 38,753 contracts to 37,421 while increasing their Loonie shorts from 12,494 to 15,884.

The value of net long bets on the Greenback increased for the third week running.  And the continuing demand for the Greenback was probably due to U.S. Fed Chairperson Janet Yellen’s June 6 speech, wherein she explained why she expects the U.S. economy will continue to improve before saying that “further gradual increases in the federal funds rate will probably be appropriate,” which likely revitalized rate hike expectations after the dismal May NFP report effectively shattered rate hike expectations and triggered a selloff.

Speaking of the May NFP report, Yellen just shrugged it off, saying that: “this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report.” She then added that: “Other timely indicators from the labor market have been more positive.”

The surge in the value of net long bets on the Greenback likely wasn’t due to Greenback strength alone, though, since there were also catalysts for the Greenback’s forex rivals.

The substantial increase in net short bets on the pound, which is apparently the largest increase in five years, was very likely due to fears of a Brexit, thanks to a poll published by Opinium on June 5, which revealed that voting intentions swung in favor of the “leave” camp since it had an unadjusted 3-point advantage versus the leave camp. (43% leave vs. 40% remain, 17% undecided).

To make matters worse, two more polls were released on June 6, and they were both in favor of a Brexit. The first one was conducted by YouGov and it showed that the “leave” camp had a 4-point lead (45% leave vs. 41% remain, 11% undecided). As for the other poll, it was conducted by ICM, and it showed that the “leave” camp had a 5-point advantage against the “remain” camp (48% leave vs. 43% remain, 9% undecided).

Fears of a Brexit likely hurt demand for the euro as well, since a Brexit would probably hurt the Euro Zone as well, albeit to a lesser extent when compared to the U.K., according to some analysts. ECB Overlord Mario Draghi even said during the June 2 ECB monetary policy decision that a Brexit is a clear downside risk to growth. Speaking of the ECB decision, the ECB’s cautious wait-and-see stance was likely a disappointment for some large speculators, which may have contributed to the slide in demand for the euro.

Moving on, I noted in the bullet points above that net bearish bets on the Aussie declined for the second straight week mainly because of the unwinding of Aussie longs. And this was likely because forex traders were using the June 7 RBA statement as an opportunity to take some profits off the table since the RBA was very neutral and balanced in its statement.

As for the large increase in net bullish bets on the yen, we can probably attribute that to the prevalence of risk aversion, as well as Japanese Prime Minister Shinzo Abe’s June 1 decision to delay a controversial sales tax hike.

If you weren’t following this particular event, just know that forex traders were wary of loading up on the yen ahead of Abe’s decision because financial media outlets were saying that a tax hike delay would mean a credit rating downgrade for Japan. However, Abe decided to delay the sales tax hike, but there were no credit rating downgrades and some credit rating companies even sounded supportive of Abe’s decision.

Another currency which defied the Greenback’s supremacy was the Kiwi, probably because speculators were, well, speculating that the RBNZ wouldn’t cut rates during the June 9 RBNZ rate decision and presser. Of course, we now know that the RBNZ maintained its monetary policy.

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.