Weekly CFTC COT Forex Positioning: Greenback Bulls Returned But Pound Resisted

After  tumbling to  $20.87 billion in the previous week , the value of net long bets on the Greenback managed to climb to  $22.25 billion, according to calculations done by Reuters. And the latest Commitments of Traders forex positioning report from the CFTC reveals that the Greenback’s advance was broad-based. The Greenback continued to lose ground to the pound, though.

Oh, please 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 (Nov. 22, 2016)

CFTC COT Forex Positioning (Nov. 22, 2016)

Lemme break down the latest numbers for y’all:

The Greenback advanced against most of its forex rivals, with the pound and the Loonie being the only exceptions. The broad-based demand for the Greenback was very likely spurred by higher rate hike expectations after Fed Chair Janet Yellen testified before the Joint Economic Committee. As for specifics, Yellen had this to say in her prepared speech (emphasis mine):

“At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives.”

EUR – The euro was nudged ever so slightly into net bearish territory. However, a closer look at positioning activity reveals that both euro bulls and euro bears were adding to their bets. It just so happens that the bears added 5,713 fresh shorts, which barely outnumbered the 5,547 fresh longs. The increase in euro shorts makes sense, given the uncertainty in the Euro Zone caused by the Trump victory, as well as Draghi’s hints that the ECB may be extending its QE program beyond March 2017 when Draghi said the following in a November 18 speech:

“So even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support. The ECB will continue to act, as warranted, by using all the instruments available within our mandate to secure a sustained convergence of inflation towards a level below, but close to 2%.”

The increase is bullish bets is harder to explain. But it is possible that U.K. PM Theresa May’s November 21 speech enticed some euro bulls to jump in, since May did say that she plans to “strike a deal that’s right for Britain and right for the rest of Europe too.”

GBP – Large speculators reduced their net bearish bias on the pound for the second consecutive week. For the most recent week, they did so by trimming 6,027 short bets on the pound. This was very slightly dented by the loss of 32 long bets on the pound. Pound shorts likely got scared off thanks to the double whammy from the BOE inflation report hearings and U.K. PM Theresa May’s speech. You see, the BOE inflation report hearings explicitly reinforced the BOE’s neutral stance on monetary policy, particularly when Carney said the following (emphasis mine):

What we have now is a neutral bias so we’ve got to a position where we think the stance, the unanimous view of members of the MPC is that the stance on monetary policy is appropriate, we’re still in a position of uncertainty there’s reasons why the economy could turn out stronger, inflation higher or the opposite, there’s risks on both sides so rates could go up they could go down – so it’s a neutral bias, we’re about as explicit as that.”

As for the PM’s speech, May was essentially trying to soothe Brexit-related fears by promising to support businesses.

JPY – Net bullish bets on the yen got slashed for the third straight week to 10,900, which is the lowest since January of this year. Positioning activity shows that both yen bulls and yen bears were pumping up their bets. However, the addition of 13,874 yen shorts was able to easily overwhelm the additional 4,098 yen longs. The slide in yen demand was very likely due to another round of bond-selling, which sent global yields higher and finally forced the BOJ to implement its so-called “QQE With Yield Curve Control” framework in order to push the yield of Japanese government bonds back down to the BOJ’s target of around 0%. The BOj implemented its framework through two bond-buying operations. And while the attempt to buy bonds failed, it sent a clear message that the BOJ was ready and willing to act.

CHF – Swissy shorts increased by 3,216 contracts while Swissy longs increased by 2,510. As a result, net bearish bias on the Swissy increased slightly. The increase in net bearish bets on the Swissy was possibly due to Switzerland’s poor trade data. Although it is also possible that safe-haven demand for the Swissy got dampened due to the prevalence of risk appetite at the time. Still, there was an increase in Swissy longs, and that may have been due to uncertainty in the Euro Zone ahead of the Italian referendum.

AUD – Non-commercial forex traders drastically reduced their net bearish bias on the Aussie. However, both Aussie bulls and Aussie bears were actually unwinding on their bets. The substantial loss of 14,326 long contracts on the Aussie was able to easily overshadow the loss of 3,513 short contracts, though. Long bets on the Aussie likely got culled because of the massive drop in iron ore prices at the time. Iron ore prices did begin to show signs of recovery by November 22, though, which likely enticed some shorts to take profits.

NZD – After two weeks of winning out against the Greenback, the Kiwi was pushed back into bearish territory, thanks to the loss of 1,768 long bets on the Kiwi, as well as the addition of 808 fresh Kiwi shorts. Aside from demand for the Greenback at the expense of the Kiwi, it’s also possible that market players were worried after New Zealand got hit by a series of earthquakes after the November 14 magnitude 7.8 quake devastated the country. Another possibility is that market players were disappointed with the quarterly core reading for New Zealand’s retail sales, since it only printed a 0.3% increase, which is way below the 1.1% expected increase.

CAD – Net bearish bets on the Loonie got pared for the second week in a row. Both Loonie bears and Loonie bulls were actually cutting down on their bets, though, with Loonie longs falling by 6,033 contracts and Loonie shorts down by 7,170 contracts. Oil staged a very strong oil rally at the time. And based on how positioning activity went down, it looks like some Loonie longs used the oil rally as an opportunity to take profits off the table while some Loonie shorts got spooked and decided to abandon ship.

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 calledTrading based on Market Sentiment in the forums awaiting your participation.