Weekly CFTC COT Forex Positioning: Aussie Bulls Got Bushwhacked

The value of net bullish bets on the Greenback climbed higher from $8.01 billion $10.42 billion during the week ending on July 19, 2016, according to calculations done by Reuters. But the latest Commitments of Traders forex positioning report from the CFTC shows that the positioning activity on the Greenback was actually mixed, losing ground mainly to the Aussie. But as Pip Diddy noted in his latest Top Forex Market Movers of the Week, the Aussie was the second-weakest currency of the week.

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 19, 2016)

CFTC COT Forex Positioning (July 19, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback took even more ground from the euro, the pound, the Swissy, and the yen, but retreated against the comdolls. Basically, the same net positioning activity as the previous week.
  • Large speculators further increased their net bearish bias on the euro by once again pumping up their euro shorts from 195,295 contracts to 211,469, which was able to more than offset the increase in euro longs from 107,635 contracts to 111,578.
  • Net bearish bias on the pound also increased, but that was thanks mostly to long bets on the pound getting cut down from 39,999 contracts to 27,959.
  • The yen retreated further against the Greenback, due to yen long getting reduced from 85,364 contracts to 79,864 and yen shorts getting bumped higher from 37,819 contracts to 40,511.
  • The Greenback continued to chip away against the net long bias on the Swissy, thanks to an increase in Swissy shorts from 16,612 contracts to 18,504.
  • The Aussie took yet another large chunk of ground from the Greenback, due mainly to Aussie longs getting pumped up from 45,938 contracts to 61,642.
  • Net bullish bets on the Kiwi increased slightly, but a closer look at positioning activity shows that Kiwi longs and Kiwi shorts were both unwinding their positions, and it just so happens that more shorts were abandoning ship than longs.
  • Loonie demand continues to win out against Greenback demand, with long bets on the Loonie increasing from 39,963 contracts to 43,086.

Just like the previous week, there was demand for the Greenback , but said demand was not broad-based since the Greenback lost ground to the comdolls. As to why the Greenback was in demand, that was likely due to lingering rate hike expectations after the June NFP report showed a solid rebound in non-farm employment (287K vs. 175K expected, 11K previous), although the other labor indicators were not so upbeat.

Rate hike expectations were likely reinforced when industrial production in June expanded at a faster-than-expected pace (+0.6% vs. +0.2% expected, -0.3% previous) and retail sales for the June period managed to soundly beat expectations (+0.6% vs. +0.1% expected, +0.2% previous). And it probably helped that the June CPI readings came within expectations.

And remember, the minutes of the June FOMC meeting revealed that “Participants weighed a number of considerations in assessing the conditions under which it would be appropriate to increase the target range for the federal funds rate,” and that “Most judged that they would need to accumulate additional information on the labor market, production, and spending,” which is why the better-than-expected readings for non-farm payrolls, industrial production, and retail sales likely reinforced rate hike expectations.

Moving on, Greenback demand was not broad-based (just like the previous week), so catalysts for the Greenback’s forex peers were also likely driving positioning activity (also like the previous week).

The yen’s second week of vulnerability against the Greenback was likely due to lingering concerns after Japanese Prime Minister Shinzo Abe’s announced a planned economic stimulus package. However, this was before some BOJ-related shenanigans triggered a short squeeze on the yen last Thursday (July 21).

The increase in short bets on the euro, meanwhile, was likely because of speculation ahead of the ECB statement, although we now know that the ECB decided to maintain its current monetary policy while keeping an easing bias and highlighting the Italian banking crisis.

As for the slide in pound demand, that was likely because of the BOE statement. True, the BOE decided to hold fire for now, but the BOE’s MPC members “expect monetary policy to be loosened in August” and they even “discussed various easing options and combinations thereof,” so a rate cut or some other easing move will likely be coming in August. And expectations of further easing moves were likely reinforced when Philip Hammond, the new U.K. Finance Minister, said on July 19 that a fiscal response to the Brexit vote may be necessary, but that “The initial response to this kind of a shock must be a monetary response delivered by the Bank of England.”

Moving on to the comdolls, it’s interesting to note that net bullish bets on the Aussie increased, thanks mostly to a jump in bullish bets. It’s interesting because the major catalyst at the time was the July 19 release of the July RBA meeting minutes, and the minutes revealed that the RBA was anticipating a slowdown in Q2, as well as being open to further easing moves. In addition, the main loser by the end of the July 18-22 trading week were the comdolls, with the Aussie being the second-weakest currency of the week, which means that comdoll bulls, especially the new Aussie bulls, likely got trapped and are hurting right now.

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.