Large speculators further raised the value of their net short positions on the Greenback from $9.40 billion to $10.28 billion during the week ending on August 29, according to calculations done by Reuters.
However, the latest Commitments of Traders forex positioning report from the CFTC, revealed that positioning activity was mixed since the Greenback was able to take some chunks of ground from the euro, the pound, and the Kiwi while getting pushed back by the rest, but mainly by the Aussie and the yen.
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 29, 2017.
Sentiment on the Greenback became even more bearish, which likely reflects disappointment after Fed Chair Yellen failed to reinforce rate hike expectations by providing a positive outlook on the economy or providing hawkish forward guidance during her Jackson Hole speech.
Also, Trump’s threats about a possible government shutdown likely helped to dampen demand for the Greenback as well.
Other than those, it’s also probable that some large players were preemptively positioning themselves ahead of the NFP report because, as Forex Gump noted in his Event Preview, the August NFP report has historically been a disappointment.
Of course, we now know that the August NFP report did disappoint by printing a net gains of 156K non-farm jobs, which is less than the 180K consensus.
Anyhow, do note that like the previous week and as mentioned earlier, positioning activity was actually kinda mixed, so positioning activity was likely also driven by catalysts for the other currencies, and not just by sentiment on the Greenback alone.
Okay, here are the major events, reports, and other catalysts for the other currencies:
Some Euro bulls decided to unwind some of their positions during the week ending on August 29 after reinforcing them during the previous week.
And since the reduction in euro longs during the week ending on August 29 was only 3,487 contracts, which is less than half the 7,482 increase during the previous week, it’s highly likely that the unwinding of euro longs reflects profit-taking after euro spot and futures surged when Draghi refrained from talking down the euro in his speech.
Do note, however, that the most recent COT report does not yet show how the large players reacted when Reuters released a report that cited “three sources familiar with discussions” at the ECB, and who claimed that “The exchange rate has become a bigger issue. It is now less favorable for an exit and a stronger argument for a muddle-through option,” adding that “The huge appreciation in the euro is already causing monetary tightening and is equivalent to an increase in interest rates.”
Bloomberg later released a similar report later that cited “unnamed “euro-area officials familiar with the matter.” And the latest COT report obviously doesn’t reflect that as well.
Non-commercial forex traders became even more bearish on the pound since they added further to their pound shorts while continuing to trim their pound longs.
Sentiment on the pound continued to worsen, likely because of Brexit-related jitters because of the deadlock in Brexit negotiations and because Brexit-related updates during the week ending on August 29 were mostly negative.
For example, European Commission President Jean-Claude Juncker criticized the U.K. government’s position papers by saying that “none of [U.K. Government’s positions papers] is actually satisfactory,” adding that “an enormous amount of issues … remain to be settled” during the course of the Brexit negotiation process.
Moreover, Juncker stressed that the E.U. “will commence no negotiations on the new relationship particularly the new economic and trade relationship between the U.K. and the E.U. before all these questions are resolved – that is to say the divorce between the E.U. and the U.K.”.
The yen advanced against the Greenback for the sixth consecutive week. However, a closer look at positioning activity shows that both yen bulls and yen bears were actually trimming their positions. It just so happens that more short bets got culled.
The reduction in yen shorts was likely due to the intense risk aversion and plunging bond yields at the time because of news that North Korea test fired a missile.
The paring of yen longs, meanwhile, was likely due to profit-taking by longs who were worried about Japan, given that North Korean missile flew over the northern Japanese island of Hokkaido and landed off the Japanese coast.
Aussie bulls and Aussie bears increased their bets during the week ending on August 29. The fresh longs overwhelmed the fresh shorts, though, so net bullish positioning on the Aussie improved.
Interestingly enough, there were no direct catalysts for the Aussie during this period. Also, iron ore was in a holding pattern at the time, although it did move higher later, but positioning activity does not yet reflect that.
Anyhow, the increase in Aussie shorts was likely a reaction to the intense risk-off vibes because of news that North Korea test fired a ballistic missile that flew over Japan.
As for the increase in Aussie longs, that was probably due to the sudden return of risk appetite on August 29, thanks to easing worries over the North Korea situation due, which was attributed to Trump’s not-so-fiery reaction.
Net bullish sentiment on the Kiwi continued to deteriorate since Kiwi shorts decided to up their bets while Kiwi longs decided to trim some of theirs.
This clearly bearish positioning activity on the Kiwi likely reflects how the large players reacted to New Zealand Treasury’s Pre-election Economic and Fiscal Update 2017 or PREFU.
After all, the PREFU revealed that growth forecasts for New Zealand were downgraded because the weaker outlook on business and residential investments.
Moreover, the PREFU showed that inflation forecasts were revised lower as well because of subdued wage growth.
Both Loonie longs and Loonie shorts were reinforcing their positions. There were far more longs than shorts, though, which is why net change in positioning on the Loonie was bullish.
The strong reading for the retail sales report, in particular, likely fueled speculation that Canada’s Q2 GDP growth would be impressive.
And we now know that Canada’s Q2 GDP growth of 4.5% quarter-on-quarter annualized and 3.7% year-on-year were better-than-expected and beat the BOC’s respective forecasts of 3.0% and 3.4% to boot.
As for the increase in Loonie shorts, that was likely prompted by the slide in oil prices, which market analysts blamed on the initial assessment that Hurricane Harvey knocked out more refineries than oil production facilities, so a buildup in crude oil inventories was initially expected.
However, that initial assessment turned out to be wrong and oil prices rebounded, but the latest COT report does not reflect that yet.
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.