Weekly CFTC COT Forex Positioning: Mixed Sentiment on the Greenback

Non-commercial forex traders boosted the value of their net bullish bets on the Greenback from $3.01 billion to $4.18 billion during the week ending on July 5, 2016, according to calculations done by Reuters. However, the latest Commitments of Traders forex positioning report from the CFTC shows that Greenback demand was not broad-based since it took ground from the pound, the Swissy, and the euro, but lost some ground to everything else.

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 (July 5, 2016)

CFTC COT Forex Positioning (July 5, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback took ground from the pound, the Swissy, and the euro, but lost some ground to everything else.
  • The Greenback took a large chunk of ground from the euro, pushing the euro deeper into the red against the Greenback. Positioning activity revealed that both euro shorts and euro longs were pumping up their positions, but there were significantly more short than longs.
  • The same positioning activity occurred on the pound, and with the same result (albeit to a lesser extent) since net bearish bets on the pound also increased.
  • Net bullish bets on the Swissy got reduced, thanks mainly to an increase in short bets from 12,038 contracts to 13,796.
  • After five consecutive weeks, non-commercial forex traders are net bullish on the Aussie again, thanks to short bets on the Aussie getting slashed from 34,508 contracts to 28,891.
  • Net bullish bets on the Loonie got ramped up, thanks to an increase in Loonie longs from 38,675 contracts to 41,031 and a simultaneous reduction in Loonie shorts from 30,726 contracts to 29,514.
  • Positioning activity on the Japanese yen was similar since yen longs increased from 85,493 contracts to 87,037 while yen shorts got pared from 25,743 contracts to 23,469.
  • Large speculators were less bearish on the Kiwi since they increased their net bullish bets from 29,798 contracts to 30, 606 while slightly reducing their bearish bets from 32,624 contracts to 32,009.

The value of net long bets on the Greenback increased, but positioning activity showed that sentiment on the Greenback was actually mixed. What’s up with that? Well, as I noted in last week’s write-up,  analysts from or interviewed by Bloomberg, Fortune, and many other financial media outlets were saying that the Fed may now be more inclined to delay hiking rates (or switch to an easing bias) after the Brexit referendum, so speculators were likely not inclined to buy up the Greenback across the board.

Speaking of the Brexit referendum, the Greenback advanced against the euro, the pound, and the Swissy, which are all European currencies. The reduction in net bullish bias on the Swissy due to an increase in short bets against the Swissy was likely due to another round of increase in SNB sight deposits, this time from CHF 423,466 million to CHF 430,337 million, which is a sign that the SNB can walk the talk when it announced that it was intervening in the markets to discourage safe-haven flows due to uncertainty over the Brexit vote.

Moving on, the increase in net bearish bets on the pound can most likely be attributed to continuing uncertainty over the Brexit vote. Adding to this was the panic caused by Standard Life’s suspension of investor withdrawals from a £2.9bn commercial property funds on July 5, which really drove the implications of a Brexit home, not to mention the BOE’s Financial Stability report, which was released on the same day and it referred to Brexit as the “the most significant near-term domestic risks to financial stability” among other things.

The Brexit issue was likely weighing down on the euro as well since the Euro Zone is a net exporter to the U.K., but other than that, worries over Italy’s banking system, given that around 17-18% of total consumer loans issued by Italian banks turned out to be non-performing loans, which is eroding confidence in Italy’s banking sector and could become a banking crisis if not resolved. Interestingly enough, there were rumors on July 5 that the Italian government would prop up the Italian banks, which is probably why speculators also increased their long bets on the euro. We now know that these rumors were shot down a day later, though.

As for the other currencies, there was a noticeable reduction in short bets on the Aussie, which was enough to push net positioning on the Aussie into bullish territory after five weeks of losing out to the Greenback. And this was likely due Aussie shorts pushing the eject button after the RBA decided to keep rates on hold amidst expectations by some speculators and analysts that the RBA would be cutting rates.

It also probably helped that risk appetite was the dominant sentiment during the week ending on July 5, 2016, which is likely why the Kiwi and the Loonie were able to take some ground from the Greenback as well. Risk aversion did begin to show signs of returning on July 4, which is probably why net bullish bets on the yen increased. These yen bulls probably got hit hard when Japanese Prime Minister Shinzo Abe announced more economic stimulus yesterday, causing the yen to weaken substantially across the board.

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.