Weekly CFTC COT Forex Positioning: Greenback Bulls Returned

After five consecutive weeks of declines, the value of net long bets on the the U.S. dollar finally increased from an eight-week low of $5.29 billion to $9.10 billion, according to calculations done by Reuters. Furthermore, the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback took ground from most of its forex rivals, with the exception of the Kiwi and 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 (Sept. 6, 2016)

CFTC COT Forex Positioning (Sept. 6, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback advanced against most of its forex rivals, with the exception of the pound and the Kiwi.
  • Kiwi bulls and Kiwi bears were both pumping up their positions, but the 5,496 increase in Kiwi longs was able to easily overpower the 1,261 increase in Kiwi shorts.
  • Non-commercial forex traders increased their net bullish bets on the pound for the second straight week. And they did this mainly by increasing their pound longs by 2,516 contracts to 38,785.
  • Net bearish bets on the euro increased for the second week, thanks primarily to the unwinding of 10,937 long bets on the euro.
  • Long bets on the yen also got culled by 7,602 contracts, but the 1,570 increase in yen shorts also helped to reduce the overall bullish bias on the yen.
  • Similar positioning activity occurred on the Swissy, but there were more new bears, since Swissy shorts increased by 5,019 contracts in contrast to Swissy longs getting pared by 1,738 contracts.
  • Large speculators reduced their net favorable bets on the Aussie by cutting down their long bets on the Aussie by 4,221 contracts to 66,211.
  • Net bullish bets on the Loonie got reduced, but a closer look at positioning activity shows that both Loonie bulls and Loonie bears were reducing their respective bets. It just so happens that the 2,672 reduction in Loonie longs overshadowed the 1,177 decrease in Loonie shorts.

I commented in last week’s write-up on the COT report that the Greenback’s wonky reaction to the disappointing NFP report was possibly due to Greenback shorts unwinding from their positions. Well, that seems to be the likely reason for the increase in the value of net long bets on the U.S. dollar during the week ending on September 6, 2016.

After all, the the 151K reading is still above the 100K needed to keep up with working-age population growth that Yellen talked about. The 151K reading is also “very promising” for some Fed officials, such as Atlanta Fed President Dennis Lockhart.

Other than that, there wasn’t really anything else that could have stoked demand for the Greenback, or at least convince Greenback bears to flee. For one, ISM’s non-manufacturing PMI reading for August was released on September 6, and it was a disappointment because it came in at 51.4. And aside from missing expectations and being a large drop from the previous month’s 55.5 reading, it also happened to be the poorest reading since March 2014. As such, the Greenback retreated across the board.

The Greenback later strengthened when bond yields drastically increased on renewed rate hike expectations after several Fed officials delivered their somewhat hawkish views, but that came later on September 9.

Anyhow, the Greenback managed to advance against most of its forex rivals, with the exception of the pound and the Kiwi.

Demand for the pound was likely due to the better-than-expected readings for the U.K.’s manufacturing PMI and services PMI, which both eased Brexit-related jitters. Do note, however, that the COT report does not yet cover positioning activity for September 7 when BOE Governor Mark Carney testified before the Treasury Committee. In his testimony, Carney repeated his promise (or threat) that the BOE will take “whatever action is needed.”

And as Pip Diddy noted in his most recent Top Forex Market Movers of the Week, Carney’s testimony was used either as a signal by pound bears to jump in or as an excuse by pound bulls to harvest some profits. Whatever the case may be, it doesn’t change the fact that the pound weakened as a result of Carney’s testimony.

Moving on, the lack of event risks for the Kiwi, another increase in dairy prices, and a broad-based commodities rally, as well as some risk-taking likely spurred demand for the higher-yielding Kiwi.

The Aussie is a higher-yielding currency as well, but Aussie bulls slashed their long bets instead. This was probably due to profit-taking after the RBA announced that it was maintaining its current monetary policy.

Meanwhile, the reduction in net bullish bets on the Loonie was likely due to unwinding ahead of the BOC statement, given that oil prices were advancing at the time.

Speaking of central bank decisions, the large reduction in euro longs was likely due to euro bulls abandoning ship just in case the ECB decided to ease further during the September 8 ECB statement. Of course, we now know that it didn’t.

The ECB statement was also the likely reason for the increase in Swissy shorts, since the SNB may try to weaken the Swissy should the ECB announce further easing.

As for the fall in yen longs, that was likely due to the prevalence of risk appetite, which caused the yen to end up as the weakest currency during the trading week ending on  September 2.

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.