Large players boosted the value of their net short positions on the Greenback from $5.32 billion to $10.23 billion during the week ending on August 8, according to the latest calculations done by Reuters. This is the largest net bearish position on the Greenback since January 2013.
And according to the latest Commitments of Traders forex positioning report from the CFTC, demand for the Greenback suffered mainly against the Loonie, the yen, and the euro.
Oh, please keep in mind that the numbers below show the net positioning of non-commercial forex traders against the U.S. dollar.
And 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.
And here is how positioning activity played out during the week ending on August 8, 2017.
Demand for the Greenback took a big hit during the week ending on August 8. And interestingly enough, the most recent COT report already reflects the latest NFP report, which was viewed as being net positive since non-farm payrolls came in better-than-expected (+209K vs. +180K previous). Also the jobless rate improved from 4.4% to 4.3%, even though the participation rate ticked higher.
This rather strange positioning activity either means that the large players were more focused on the other currencies or they weren’t too convinced that the NFP report was really all that good for the Greenback (or maybe both).
Okay, here are the major events, reports, and other catalysts for the other currencies:
After trimming their long positions on the euro for the past couple of weeks, non-commercial forex traders finally decided to add to them while slightly trimming their short bets as well.
Some market analysts have been clamoring that the euro has climbed too far and too fast, and so they believe that a correction is not too far away.
And since euro spot and futures did correct a bit, maybe some of the large players decided that the euro corrected enough and jumped in with fresh longs and/or took profit on their shorts.
Other than that, it’s possible that the previous COT report did not fully reflect how large players reacted to the flash estimate for Euro Zone HICP since the previous COT report showed bearish positioning activity, even though HICP rose by 1.3% year-on-year in July, which matched the previous month’s reading while the 1.2% increase for the core reading, which is better than the 1.1% consensus, is already within the ECB’s 2017 forecast.
In other words, upbeat overall. And the most recent COT report probably reflects that more accurately.
Large forex traders trimmed both their bullish and bearish positions on the pound. Far more bearish positions got culled, though, so net bearish bias on the pound eased after ramping up for two weeks.
The only major catalyst at the time was the BOE statement. And while the BOE tried its best to sound hawkish, the market reacted by dumping pound spot and futures.
Looking at how positioning activity went down, the reduction in pound shorts very likely shows profit-taking. What’s interesting here is that there were no fresh bears, which implies that large players were not too committed to shorting the pound further based on the BOE statement alone, which is probably why the pound’s price action lacked uniform direction during the August 7 to 11 trading week.
Also, the reduction in pound longs was only very minimal, which probably means that pound bulls were not too troubled by the BOE statement. After all, the BOE did say that they were still looking to hike.
Large players added to their yen longs while trimming their yen shorts for the second week in a row. This time, however, net change in positioning was driven mainly by the substantial reduction in yen shorts.
Bond yields were in decline at the time, which likely helped to entice some yen bulls to jump in while scaring away the bears.
Also, positioning activity already captures how large players reacted to Trump’s “fire and fury” warning to North Korea, which was being cited as the main source of risk aversion that fueled demand for the safe-haven yen during the August 7 to 11 trading week.
Positioning activity does not yet fully reflect the North Korea situation, though, since the latest COT report does not yet show how large players reacted to North Korea’s response to Trump that it would fight back against perceived U.S. provocation by launching a missile strike on U.S. military assets in Guam.
Net positioning on the Swissy has been flipping back and forth. And during the week ending on August 8, that happened to land on the net bearish side of the coin, thanks to the increase in Swissy shorts overpowering the increase in Swissy longs.
The increase is Swissy longs is understandable because, as mentioned in the discussion on the yen, risk aversion prevailed at the time.
The increase in Swissy shorts, meanwhile, is more difficult to comprehend. Maybe it shows that some large players really believed the narrative that monetary policy divergence would work against the Swissy.
It’s also possible that some large players were betting that the SNB would intervene and weaken the Swissy in order to discourage safe-haven demand. There’s no way to know for sure.
After advancing against the Greenback for seven consecutive weeks, the Aussie finally found itself taking a step back against the Greenback since the large increase in Aussie shorts was more than able to offset the increase in Aussie longs.
This rather mixed positioning activity on the Aussie was likely due to conflicting sentiment on the Aussie.
On the one hand, Aussie bulls were likely more focused on the iron ore rally at the time, thanks to upbeat Chinese data and firm Chinese demand.
On the other hand, Aussie bears probably had their sights on the RBA statement wherein the RBA tried to talk down the Aussie by saying that “the higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
Also, Aussie bears were likely shorting the Aussie because of Australia’s narrower-than-expected trade surplus in June ($0.86B vs. $1.78B expected, $2.02B previous). Moreover, risk aversion was the more prevalent sentiment at the time, which likely helped to entice more Aussie bears than bulls.
Some Kiwi bulls decided to abandon ship while Kiwi bears marginally added to their position.
This bearish positioning activity on the Kiwi likely reflects how large players reacted to New Zealand’s jobs report, which was a disappointment overall because the jobless rate “improved” from 4.9% to 4.8% in Q2 due to the labor force participation drop deteriorating hard from 70.6% to 70.0%. Also jobs growth was actually negative, printing a 3K decrease in Q2.
Bearish positioning activity also likely reflects the RBNZ’s latest quarterly survey of expectations since that showed that inflation expectations worsened.
Do note that positioning activity does not yet reflect the RBNZ statement, wherein the RBNZ maintained its neutral monetary policy bias and forecast for a rate hike by late 2019 while stressing the “need” for the Kiwi to weaken.
Positioning activity also does not yet reflect talks about possible forex intervention from the RBNZ, courtesy of remarks from RBNZ Governor Wheeler and RBNZ Assistant Governor McDermott.
Large forex traders substantially boosted their net long positions on the Loonie for the 11th consecutive week. Interestingly enough, oil was slightly down at the time, but positioning activity on the Loonie was very bullish since large players significantly increased their long bets while trimming their shorts.
There’s no clear reason for this weird positioning activity, but it’s possible that some large players are still betting on further rate hikes from the BOC.
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.