Weekly CFTC COT Forex Positioning: Some Pound Bulls Escaped!

For the week ending on June 21, 2016, large speculators raised their net bullish bets on the Greenback from to $6.62 billion after previously cutting it down to $2.72 billion from $11.30 billion, according to calculations done by Reuters. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback took ground from almost all of its forex rivals, but mainly the pound and the Loonie.

However, it’s worth noting that in the pound’s case, there was a substantial decrease in long bets on the pound, while short bets only saw a small increase, so the bulls who abandoned ship before the yuuuuge drop in the pound in the aftermath of the pro-Brexit vote were really lucky or really prudent in unwinding their bets.

Anyhow, 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 21, 2016)

CFTC COT Forex Positioning (June 21, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback took ground from almost all of its forex rivals during the week ending on June 21, 2016.
  • The pound was pushed deeper into  bearish territory against the Greenback, thanks to pound bulls drastically slashing their long bets from 61,706 contracts to 41,707.
  • Aside from the pound, the Loonie was the main loser against the advancing Greenback bulls since net bullish bets on the Loonie got reduced substantially, thanks mainly to short bets on the Loonie increasing from 23,954 to 38,069.
  • Large speculators were trimming both their short and long positions on the euro, but there were more bulls abandoning the euro ship, which is why net bearish bias on the eur0 moderately increased.
  • They were doing the same on the Swissy and the Aussie, but net bullish bets on the Swissy only saw a very modest decrease while net bearish bets on the Aussie only had a very small increase and was essentially unchanged.
  • The opposite positioning activity was happening on the yen since both long and short bets on the yen got pumped up. There were more yen bears jumping in, though, which is why net bullish bets on the yen decreased.
  • Non-commercial forex traders very slightly pared their net bearish bias on the Greenback, thanks mainly to a small increase in Kiwi longs from 29,558 contracts to 30,013.

Given that net positioning on some currencies (namely the Kiwi, the Aussie, the Swissy) versus the Greenback were essentially unchanged while other currencies lost substantial ground against the Greenback (the pound and the Loonie, in particular), I am of the opinion that the increase in the value of net bullish bets on the Greenback was largely due to drivers for the other currencies, rather than actual demand for the Greenback, especially since most catalysts for the Greenback during the week ending on June 21, 2016 were actually net negative for the Greenback

First, we have the FOMC statement, which was a bit dovish overall, since Kansas City Fed President Esther L. George no longer wanted to vote for a rate hike, making the vote to maintain the current monetary policy a unanimous one. Moreover, the Fed downgraded its GDP growth forecasts, and even projected a slower path to tightening for 2017 and 2018.

There were some upbeat points, though. The first one is that interest rate expectations were increased due to expectations that labor market conditions will continue to improve, as well as the fading of “transitory” effects from past price declines of energy and other imported commodities. The other somewhat upbeat point is that rate hike projections for 2016 were relatively unchanged, so the Fed is still open to hiking once or twice this year.

The next major event was the release of CPI readings for May, and they were a bit disappointing since the headline month-on-month reading only saw a 0.2% increase, which is below the expected 0.3% increase, as well as the previous month’s 0.4% increase.

Finally, we had Yellen’s testimony before the Senate Banking Committee, wherein she basically expounded on the views that the Fed already shared during the FOMC statement, as well as her June 6 speech.

So, what are the likely drivers for the other currencies? Well, we obviously had the June 23 Brexit referendum for both the pound and the euro. Of course, we now know that the UK voted in favor for a Brexit. And contrary to price action and poll numbers ahead of the referendum, it looks like the big players were actually unwinding their long positions on the pound, since the increase in net bearish bets on the pound was mainly due to long bets getting cut down.

Large speculators also wisely slashed their long bets on the euro ahead of the referendum, although the large decrease in euro shorts from 160,999 contracts to 149,985 is more puzzling. However, it’s highly likely that speculators were also reacting to ECB President Draghi’s June 21 testimony before the European Parliament’s Economic and Monetary Affairs Committee, wherein Draghi commented that: “Further monetary policy stimulus is in the pipeline.” Draghi was apparently alluding to “measures that are still at an early stage of implementation,” particularly the ECB’s new series of targeted longer-term refinancing operations (TLTRO II) that was introduced back in March, but the market reacted as if Draghi was going to introduce more easing, and euro shorts probably used that as an opportunity to punch out.

As for the large decrease in net bullish bets on the Loonie, that was likely due to the slide in oil prices, thanks to uncertainty over the Brexit vote, as well as oversupply jitters after Iraq expanded its oil terminal in Kharg island.

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.