Weekly CFTC COT Forex Positioning: No Respite for the Pound

Non-commercial forex traders pared the value of their net bullish bets on the Greenback for the second week running. This time, from $12.81 billion to $11.41 billion, according to calculations done by Reuters. The latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback still had a mixed performance, however. Also, the Greenback continues to take ground from the pound.

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 (Aug. 9, 2016)

CFTC COT Forex Positioning (Aug. 9, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback had yet another mixed performance against its peers, taking ground from the pound, the Kiwi, and the Loonie while losing ground to the rest.
  • The pound continues to lose out against the Greenback. Net bearish bets on the pound have been increasing non-stop for six consecutive weeks now. And the recent increase in net bearish bets was due to short bets on the pound increasing from 115,890 contracts to 125,605.
  • Non-commercial forex traders reduced their net bullish bias on the Loonie, but positioning activity shows that both Loonie longs and Loonie shorts increase. It just so happens that the increase in Loonie shorts from 23,953 contracts to 28,281 more than offset the increase in Loonie longs.
  • Similar positioning activity occurred on the Kiwi. And the increase in Kiwi shorts from 26,832 contracts to 28,927 was enough to push the Kiwi into bearish territory against the Greenback for the first time in four weeks.
  • The Japanese yen took the most ground from the Greenback, thanks to long bets on the yen getting pumped up from 76,575 contracts to 86,719.
  • The euro is still losing out to the Greenback overall, but it was able to take back some ground, thanks to euro shorts getting cut down from 208,619 contracts to 198,841.
  • Net bullish bias on the Aussie dollar increased, due to long bets on the Aussie increasing from 58,269 contracts to 59,586 while shorts got trimmed from 26,906 contracts to 24,702.
  • Large speculators became net bullish on the Swissy again, but positioning activity showed that both bulls and bears were reducing their positions. It just so happens that more bears were unwinding their short bets.

Despite the better-than-expected July NFP report, the value of bullish bets on the Greenback declined, so large speculators apparently didn’t think that the NFP report was enough to convince the Fed to hike within the year.

It probably didn’t help that the larger-than-expected increase in non-farm employment (255K vs. 180K expected) was due to seasonal adjustments, with the unadjusted reading showing a decline. Also non-farm productivity dropped for the third consecutive quarter in Q2 (-0.5% vs. +0.5% expected), which is another major disappointment. This is so because productivity is a major consideration for hiking rates, as discussed by most Fed officials in the June FOMC meeting minutes.

The Japanese yen was the greatest benefactor of the Greenback’s weakness since it had the largest net absolute change in positioning. Demand for the yen was likely due to perceived ineffectiveness of the Japanese government’s ¥13.5 trillion fiscal measure, especially since only ¥4.6 trillion are earmarked for new spending this year. This perceived ineffectiveness then likely allowed safe-haven flows to make their way to the yen. Speaking of safe-haven flows, that’s also probably the reason why the Swiss franc was pushed back into net bullish territory against the Greenback.

Meanwhile, demand for the Aussie very likely got boosted by the iron ore rally. As for the reduction in bearish bias on the euro, that was probably because of the search for higher yield. You see, yields on U.S. government bonds are now very low, with yields for 10-year notes at negative for yen and euro investors. At the same time, bond yields from some of the Euro Zone member states like Spain, Portugal, and Italy remain high, so capital flows from the U.S. to the Euro Zone are to be expected.

Moving on, the increase in net bearish bets on the pound was very likely because of the August 4 MPC statement. During that event, the BOE delivered on a highly anticipated rate cut, but went beyond market expectations by restarting its QE program while expanding its target asset to also include £10 billion worth of corporate bonds.

And that’s not the end of it since the BOE also introduced a term funding scheme to ensure that the rate cut is passed on borrowers, as well as clear forward guidance when it said that “a majority of members expect to support a further cut in Bank Rate to its effective lower bound.

Meanwhile, the Kiwi’s slide into net bearish territory was likely spurred by speculation ahead of the RBNZ statement (we now know how that went down).

As for positioning activity on the Loonie, that was likely caused by Canada’s disappointing jobs report, which caused USD/CAD to temporarily decouple from oil prices on August 5.

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.