After seven consecutive weeks of losing ground to its peers, the Greenback finally managed to take back some territory. And so the value of net short positions on the Greenback fell from $10.23 billion to $8.84 billion during the week ending on August 15, according to the latest calculations done by Reuters.
And according to the latest Commitments of Traders forex positioning report from the CFTC, the Greenback advanced mainly at the expense of the Loonie and the euro, although the Greenback also took ground from the Kiwi and the pound.
However, the Greenback had no chance against the yen since the yen took another chunk of ground from the Greenback.
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 15, 2017.
Sentiment on the Greenback finally improved after seven weeks. And the main catalysts were likely the latest U.S. CPI report, Dudley’s August 14 interview, and the latest U.S. retail sales report.
The U.S. CPI report for July actually missed expectations since the headline and core readings only showed a 0.1% month-on-month rise apiece when both were expected to rise at a faster 0.2% pace.
Meanwhile, the headline year-on-year was also miss, coming in at 1.7% increase (+1.8% expected, +1.6% previous).
However, there were some green shoots since the headline year-on-year reading did put an end to four consecutive months of deteriorating annual readings and supports the Fed’s forecast that CPI will begin to pick up soon.
In addition, the annual core reading came in at +1.7%, which is the same rate as the previous month and is within expectations to boot and shows that underlying inflation was steady at least.
In his August 14 interview, meanwhile, New York Fed President Dudley said that he thinks that inflation could still go higher before saying that he is willing to vote for another hike this year, provided that the economy continues to evolve as expected of course.
As for the July retail sales report, that showed that headline retail sales in the U.S. rose 0.6%, soundly beating expectations for a 0.3% increase. Moreover, most retail store types reported higher sales, which is why the core reading increased by 0.5%, which is a bigger increase than the expected +0.3%.
Not only that the details of the report revealed that the improvements were broad-based across various store types and the previous readings even got upgraded to boot.
Do note, however, that the latest COT report does not yet reflect how large players reacted to the news that Trump disbanded his Manufacturing Council and Strategy & Policy Committee, since the move apparently made investors worry about Trump’s policies and caused Greenback spot and futures to start tanking.
As for the other currencies, here are the major events, reports, and other catalysts for the other currencies:
Large players were rather bearish on the euro since they slashed their euro longs bigly while bumping up their shorts.
Economic reports at the time were mixed but net positive and there weren’t really any major negative news. However, some market analysts have been clamoring that the euro has climbed too far and too fast for a while now.
As such, the reduction in euro longs may just be due to profit-taking by euro bulls while the paring of euro shorts may reflect speculation that the euro will fall a bit.
Another possibility is that positioning activity reflects preemptive positioning ahead of the ECB minutes, with bulls unwinding their positions just in case the minutes revealed a more dovish side to the ECB while bears were betting on a more dovish tone.
Of course, we now know that the ECB minutes revealed that “concerns were expressed about the risk of the exchange rate overshooting in the future.”
Do note, however, that the most recent COT report does not yet reflect the August 16 Reuters report that cited unnamed sources who claimed that Draghi will not be talking about the ECB’s future tightening plans, which really disappointed a lot of euro bulls.
Positioning activity on the pound was mixed since pound bulls and pound bears both reinforced their respective positions. The bears got more reinforcement, though, which is why overall sentiment on the pound got pushed deeper into bearish territory.
The large influx of fresh pound shorts was likely a reaction to the U.K.’s CPI report for the July period since headline CPI fell by 0.1% month-on-month in July, which is the first negative reading in six months and missed expectations that it would be flat for the month.
In addition, the year-on-year reading also missed the consensus for a 2.7% rise by coming in at +2.6%. The core reading was also a miss, printing +2.4% year-on-year rise when the market was expected a 2.5% increase.
Going back to positioning activity, the fresh pound longs were likely due to, well, the CPI report as well because while the readings did miss the market’s expectations, the 2.6% rise in the headline reading is still actually in-line with the BOE’s staff forecast, based on the BOE’s August Inflation Report.
CPI is therefore still evolving within the BOE’s forecasts, so the latest CPI report is unlikely to convince MPC members to switch to a more dovish policy bias.
The Greenback had no chance against the yen since yen bears further drastically reduced their positions while yen bulls slightly added to their, which resulted in the yen taking another chunk of ground from the Greenback.
This rather bullish positioning activity likely shows the fallout after Trump’s “fire and fury” warning to North Korea, which triggered a bout of intense risk aversion.
And that only intensified when North Korea responded to Trump by warning that further U.S. provocation would be met by launching a missile strike on U.S. military assets in Guam.
Tensions over North Korea have abated recently, though, but the most recent COT report does not yet reflect that.
Net positioning on the Swissy was only minimal, because both Swissy longs and Swissy shorts added to their positions, which almost canceled each other out.
As to why Swissy bulls added to their positions, that’s likely due to the prevalence of risk aversion at the time, as noted earlier when we discussed the yen.
The increase in Swissy shorts is a bit weird, however. Although it’s possible that some large players were expecting the SNB to step in and curb the Swissy’s strength.
The Aussie’s seven-week crusade against the Greenback met a speedbump during the previous week. However, the Aussie’s crusade resumed during the week ending on August 15.
Iron ore did rally during the August 14-18 trading week. However, iron ore was not yet in rally mode during the period covered by the latest COT report. In fact, iron ore got dumped during the period of the COT report because of a warning from the China Iron and Steel Association that the recent surge in iron ore prices is supposedly “not driven by market demand or reduced market supply.”
As such, the bullish positioning activity on the Aussie is rather weird.
The Kiwi got pushed back by the Greenback for the second week in a row, as Kiwi bulls abandoned ship and Kiwi bears took over.
Sentiment on the Kiwi very likely deteriorated because of the RBNZ statement since the RBNZ maintained its neutral monetary policy bias and forecast for a rate hike by late 2019 but stressed the “need” for the Kiwi to weaken.
In addition, RBNZ Assistant Governor McDermott said in an interview that the strong Kiwi “does need to adjust down” for the good of the New Zealand economy.
Moreover, RBNZ Governor Wheeler testified before the Finance and Expenditure Select Committee that the RBNZ has an “intervention capability,” and that the RBNZ “have used that in the past” and “that’s something that is always open” to the RBNZ.
Furthermore, Assistant Governor McDermott said in another interview that the RBNZ’s stronger language on the “need” for the Kiwi to weaken is “the first step” towards a possible currency intervention.
After 11 straight weeks, the Loonie’s advance against the Greenback finally got stopped in its tracks, thanks to the unwinding of Loonie longs.
Positioning activity does not reflect how large non-commercial forex traders reacted to Canada’s July CPI report, though, since that showed that two of the BOC’s three measures for core CPI improved, which reinforced the idea that the BOC made the right call when it hiked rates, as well as supporting the idea that the BOC may have room to hike further.
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.