Weekly CFTC COT Forex Positioning: Greenback Bulls Retreat

Speculators pared their net bullish bets on the Greenback to $3.01 billion from $6.62 billion during the week ending on June 28, 2016, according to calculations done by Reuters. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback was pushed back pretty much across the board.

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 28, 2016)

CFTC COT Forex Positioning (June 28, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback was pushed back almost across the board during the week ending on June 21, 2016.
  • The Greenback was only able to take ground from the euro, but net change in positioning was so small that it was essentially unchanged. A closer look at positioning activity shows that both euro bulls and euro bears drastically pumped up their positions, though, with euro longs jumping from 88,639 contracts to 109,580 and euro shorts climbing from 149,985 contracts to 171,514.
  • Non-commercial forex traders were less bearish on the pound, since they slightly increased their long bets on the pound from 41,707 contracts to 43,272 while trimming their short bets from 93,654 contracts to 85,985.
  • Net bullish bias on the yen increased, thanks mainly to yen longs getting jacked up from 79,398 contracts to 85,493.
  • Net bullish bets on the Aussie got reduced, but positioning activity shows that both Aussie bulls and bears were cutting down on their positions. It just so happens that more shorts were bailing out.
  • The same positioning activity happened on the Swissy, the Loonie and the Kiwi, although net change in positioning on the Kiwi is much less pronounced to the point that it was essentially unchanged.

The broad decline in demand for the Greenback during the week ending on June 28, 2016 was very likely due to the majority vote in favor of a Brexit, which triggered speculation that the Fed will now be more inclined to delay hiking rates (or may even switch to a cutting bias), according to analysts from or interviewed by Bloomberg, Reuters, Fortune, and many other financial media outlets.

It also probably didn’t help that the U.S. economic reports that were released during this period were mostly poor. For example, the trade deficit in goods widened to $60.6 billion in May from $57.5 billion. Durable goods orders also contracted at a much faster pace in May, contracting by 2.2% when it was only expected to contract by 0.5%. Not only that, the previous reading was drastically revised from a 3.4% increase to a 0.8% decrease and the core reading came in at -0.3% (+0.1% expected, +0.5% previous). And while the final reading for Q1 U.S. GDP was revised higher from 1.0% to 1.1%, it still showed that U.S. GDP growth continued to slow down on a quarter-on-quarter basis after peaking at 3.9% back in Q2 2015.

The other currencies naturally exploited the Greenback’s weakness since almost all currencies saw a reduction in short bets. However, the yen not only saw a reduction in short bets, but an increase in long bets as well, and this was very likely due to safe-haven demand in the aftermath of the pro-Brexit vote.

The Swissy is a safe-haven currency as well, but Swissy bulls probably got scared off when the SNB announced that it was intervening in the markets and sight deposits of domestic Swiss banks saw an increase, which heavily implies that the SNB was indeed intervening.

Moving on, the only other currencies that saw an increase in long bets were the euro and the pound, which is rather puzzling given the pro-Brexit vote. However, it’s possible that some speculators saw the large drops for both currencies as a chance to buy at bargain prices. Other speculators, meanwhile, may have deduced that both the pound and the euro will recover a bit since Article 50 of the TEU won’t be triggered immediately, thereby giving the markets a chance to stabilize since the process for an actual Brexit won’t be starting right away. And it probably helped that Cameron promised that he will “steady the ship” before he steps down as British PM.

It is worth pointing out that short bets on the pound got reduced, which can easily be attributed to Greenback weakness and profit-taking by the shorts after the pound’s belly flop due to the Brexit vote. What’s strange, however, is that short bets on the euro actually increased rather dramatically.

In fact, the euro was the only currency that saw an increase in short bets, although it’s not very clear because long bets also got pumped up, as I noted in the bullet points above. What’s up with that? Well, the most likely reason is that many speculators were probably betting that the ECB may introduce preemptive easing measures due to the pro-Brexit vote. After all, ECB Overlord Draghi did say in his June 21 testimony before the European Parliament’s Economic and Monetary Affairs Committee that “the ECB is ready for all contingencies following the UK’s EU referendum” and that the ECB stands ready “to act by using all the instruments available within [its] mandate, if 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.