According to the calculations done by Reuters, sentiment on the Greenback soured again since large players raised the value of their net short positions on the Greenback from $8.84 billion to $9.40 billion during the week ending on August 22 after trimming it during the previous week.
And the latest Commitments of Traders forex positioning report from the CFTC, revealed that the Greenback ceded ground mainly to the euro and the yen. However, the Greenback continued to take ground from the Kiwi and the pound. Positioning activity on the pound, in particular, was very noticeably bearish, with a significant boost to bearish positions.
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 22, 2017.
The Greenback resumed its slide into bearish territory, according to the latest COT report.
And the deterioration in demand for the Greenback during the week ending on August 22 very likely reflected wavering faith in Trump’s ability to deliver on growth-oriented plans, which include infrastructure spending and tax cuts (among others).
After all, Trump disbanded his Manufacturing Council and Strategy & Policy Committee, which was viewed negatively by investors and market players.
Rather than putting pressure on the businesspeople of the Manufacturing Council & Strategy & Policy Forum, I am ending both. Thank you all!
— Donald J. Trump (@realDonaldTrump) August 16, 2017
Also, positioning activity already partially reflects worries related to Trump’s threats of a government shutdown if Congress doesn’t allocate the funds needed to build the Great Wall of Trump.
Other than that, the latest COT report also likely shows how large players reacted to the latest FOMC minutes, since the minutes revealed that Fed officials were split on their outlook on inflation and the path of future rate hikes, with “some” FOMC members arguing for delays to further hikes until inflation picks up.
Do note, however, that the latest COT report does not yet reflect how large players positioned themselves in response to Fed Chair Yellen’s Jackson Hole speech, wherein she refrained from talking about the U.S. economy and the monetary policy, which caused Greenback spot and futures to tank.
Also, do note that positioning activity was actually kinda mixed, so positioning activity was likely driven by catalysts for the other currencies, and not just by sentiment on the Greenback alone.
Anyhow, here are the major events, reports, and other catalysts for the other currencies:
Large non-commercial forex traders boosted their euro longs while simultaneously paring their euro shorts, so large speculators were clearly bullish on the euro.
Positioning activity shows how large players were positioning themselves ahead of ECB President Draghi’s Jackson Hole speech. And interestingly enough, catalysts ahead of Draghi’s speech were mostly negative.
The latest ECB minutes, for example, revealed that “concerns were expressed about the risk of the exchange rate overshooting in the future.”
Also, an August 16 Reuters report cited unnamed sources as saying that Draghi will not be talking about the ECB’s future tightening plans during his speech.
Even so, it looks like large players were unfazed since sentiment on the euro improved overall. Of course, we now know that Draghi retained the ECB’s somewhat dovish forecast on inflation while maintaining the ECB’s forward guidance on monetary policy during his Jackson Hole speech. But we also now know that Draghi didn’t try to talk down the euro, which was viewed as net positive for the euro.
Bearish sentiment on the pound intensified, thanks largely to a large influx of fresh pound shorts, although the trimming of pound longs also helped.
This rather bearish positioning activity on the pound very likely reflects a less optimistic outlook on the U.K.’s economy after the U.K.’s CPI report for the July period missed expectations.
Also, the U.K.’s latest jobs report looked good on the surface. But a closer look at the details, revealed some weakness. Real earnings, in particular, was rather disappointing since real average weekly earnings fell by another 0.4% if bonuses are excluded.
Moreover, the U.K.’s July retail sales report was net negative as well since the better-than-expected 0.3% month-on-month increase in July was offset by the June reading getting reduced from +0.6% to +0.3%. In addition, retail sales volume increased by 1.3% year-on-year in July, is much weaker compared to June’s 2.9% rise.
Aside from poor economic data and souring outlook on the U.K. economy, Brexit-related jitters likely dampened positive sentiment on the pound as well since the U.K. government started releasing its policy papers on August 21 in preparation for the third round of Brexit negotiations.
The yen’s advance against the Greenback is relentless, since the yen took another chunk of ground from the Greenback. This marks the fifth consecutive week of improving sentiment on the yen at the expense of the Greenback.
And sentiment on the yen likely continued to improve because bond yields slumped hard at the time because of concern related to growth after Trump disbanded his his Manufacturing Council and Strategy & Policy Committee, as well as disappointment over the FOMC minutes, market analysts say.
Like in the previous week, net positioning on the Swissy was only very minimal. Unlike the previous week, however, positioning activity on the Swissy was very minimal as well, although clearly bearish since Swissy longs very slightly trimmed their positions while Swissy shorts slightly added to theirs.
There are no apparent catalysts for this bearish positioning activity on the Swissy, but it’s possible that some large players were expecting the SNB to step in and curb the Swissy’s strength.
Net change in positioning on the Aussie was very minimal. And while a closer look at positioning activity shows that both Aussie bulls and Aussie bears were slashing their positions, bulls did slightly win out since there with slightly more shorts that got culled.
The reduction in Aussie shorts probably shows bears getting spooked by the iron ore rally at the time.
Meanwhile, the reduction in Aussie longs likely shows profit-taking by the Aussie bulls, possibly because Australia’s July jobs report was somewhat net negative since the net gain of 27.9K jobs in July was driven by part-time employment growth. Full-time employment, meanwhile, lost 20.3K jobs.
Non-commercial traders reduced their net bullish bias on the Kiwi by trimming their long positions in favor of the Kiwi. And this culling of Kiwi longs very likely showed preemptive unwinding ahead of the New Zealand Treasury’s Pre-election Economic and Fiscal Update 2017 or PREFU.
The latest COT report does not yet reflect how large players reacted to the release of the PREFU, but we now know that the PREFU was a severe disappointment for Kiwi bulls since the Treasury downgraded its growth and inflation forecasts.
Positioning activity on the Loonie was similar to that of the Aussie’s in that Loonie longs and Loonie shorts were both slashing their respective positions, with the net effect being a very minimal shift in net positioning. Unlike the Aussie, however, Loonie bears had a slight advantage since more Loonie longs were pared.
The reduction in Loonie longs likely shows profit-taking by bulls or bulls getting spooked by the hard drop in oil prices during August 21, which was attributed by market analysts to profit-taking by oil bulls.
The paring of Loonie shorts, meanwhile, likely reflects Loonie bears abandoning ship after Canada’s July CPI report revealed that two of the BOC’s three preferred measures for core inflation printed upticks.
Also, Canada’s July retail sales report was viewed as net positive since the weakness in the headline reading was due to volatile components but these volatile components are not part of the core reading. And since other retail store types printed higher sales in July, the core reading printed a 0.7% month-on-month increase, beating expectations that the core reading would be flat for the month.
And that, together with the upbeat CPI report, reinforced the idea that the BOC made the rate call in hiking rates, as well as raising expectations that the BOC may be able to hike again this year, which is obviously bad for the Loonie bears.
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.