Weekly CFTC COT Forex Positioning: Greenback Bulls Got Trapped

According to calculations done by Reuters, the value of net long bets on the Greenback jumped from $10.42 billion to $13.66 billion during the week ending on July 26, 2016. And the latest Commitments of Traders forex positioning report from the CFTC reveals that the Greenback pushed back against most of its forex rivals, taking the most ground from 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 (July 26, 2016)

CFTC COT Forex Positioning (July 26, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback pushed back against all its forex rivals, with the exception of the Loonie.
  • The Greenback took the most ground from the euro,  thanks mainly to short bets on the euro getting pumped up from 211,469 contracts to 221,793. Although long bets getting culled from 111,578 contracts to 109,193 also helped.
  • The pound had the second largest net absolute change in positioning, due to the large increase in short bets from 102,345 contracts to 110,391. This more than offset the small increase in long bets from 27,959 contracts to 29,819.
  • Net bullish bets on the yen decreased, thanks to long bets on the yen getting cut down from 79,864 contracts to 74,074.
  • The Swissy looks like it’s on the brink of losing out to the Greenback. A closer look at positioning activity shows that bulls and bears were both ramping up their positions. It just so happens that the increase in Swissy shorts from 18,504 contracts to 25,861 was more than enough to offset the increase in Swissy longs from 23,191 contracts to 26,807.
  • Large speculators are about to become net bearish on the Kiwi, thanks to long bets on the Kiwi getting pared from 29,156 contracts to 26,598.
  • Non-commercial forex traders are less bullish on the Aussie, but a closer looks shows that both bulls and bears were unwinding their positions. There were more bulls abandoning the Aussie ship, however, which is why net bullish bets on the Aussie declined.
  • The Loonie was the only currency that was able to advance against the Greenback, due mainly to Loonie longs increasing from 43,086 contracts to 44,023.

The Greenback was able to take ground from most of its forex rivals, so there seems to have been broad-based demand for the Greenback during the week ending on  July 26, 2016.

This broad-based demand for the Greenback was likely driven by speculation ahead of the July 27 FOMC statement. And most speculators were probably expecting the Fed to sound upbeat, given the rebound in employment during the June NFP report, the expansion in industrial production, and strong retail sales.

However, we now know that the Fed presented a disappointingly neutral tone and even refrained from providing forward guidance during the July 27 FOMC statement, which kicked the Greenback lower against its forex rivals, so some Greenback bulls likely got trapped.

Moving on to the likely drivers for positioning on the other currencies, the large increase in net bearish bets on the euro was likely driven by jitters over the Italian banking crisis, especially since the ECB also highlighted it during the July 21 ECB statement and press conference, although the ECB did decide to maintain its current monetary policy. However, the ECB also said that it had an easing bias, which probably attracted even more euro bears.

The increase in net short bets on the pound, meanwhile, was very likely due to Markit’s special edition PMI report, since the U.K.’s manufacturing PMI dropped to  a 41-month low of 49.1 while the services PMI slumped to an 88-month low of  47.4. This shows that the Brexit referendum has already negatively impacted business sentiment and conditions.

Next, the yen’s continued slide against the Greenback was likely due to speculation that the BOJ will match Japanese PM Shinzo Abe’s planned $265 billion fiscal stimulus package with an equally large monetary stimulus package or maybe even some form of so-called “helicopter money”. Of course, we now know that the BOJ only did the bare minimum during the July 29 BOJ statement, although the BOJ did say that it would conduct a “comprehensive assessment” of its monetary policy by September.

As for the unwinding of positions on the Aussie, especially Aussie longs,  that was likely because of the July RBA meeting minutes, since it showed that the RBA was open to further easing and was expecting Australia’s Q2 GDP growth to moderate to boot.

The reduction of long bets on the Kiwi, meanwhile, was probably because of the RBNZ’s release of consultation papers on how to counter the potential housing bubble in New Zealand, as well as the RBNZ’s economic update, wherein the RBNZ said that “At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.” These two taken together shows that the RBNZ really wants to cut rates, which likely stoked rate cut expectations.

As for the increase in long bets on the Loonie, that’s a bit of a mystery since oil was on the decline at the time. Canada did get a few upbeat economic reports, though. Retail sales, for example, increased by 0.2% month-on-month, beating expectations that it would stagnate.

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.