Net bearish positions on the Greenback increased further, with the value of net short positions on the U.S. dollar jumping from $11.57 billion to $13.19 billion during the week ending on September 19, according to calculations done by Reuters.
And the latest Commitments of Traders (COT) forex positioning report from the CFTC shows that the Greenback lost a huge chunk of ground against the pound. Although the Aussie and the Loonie were also able to take ground from the Greenback. However, the large increase in euro shorts was able to mitigate these.
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 September 19, 2017.
Positioning activity was mixed yet again, so catalysts for the other currencies continue to have a larger role to play.
Even so, large players bumped up their long positions on most currencies, which implies that there was broad-based bearish sentiment against the Greenback.
As to why large players were betting against the Greenback, that was likely because they were expecting the Fed to downgrade its inflation forecasts and sound dovish during the FOMC statement.
We now that the Fed did downgrade its inflation forecasts but remained upbeat during the latest FOMC statement. More importantly, we now know that the Fed’s forecasts for the Fed Funds Rate was unchanged, so the Fed is still on track for one more rate hike before the year ends. Moreover, the majority of Fed officials were still willing to vote for a hike.
Given all that, U.S. dollar spot and futures surged across the board. However, the latest COT report does not reflect that yet.
Anyhow, here are the major events, reports, and other catalysts for the other currencies:
More euro bears came out of the woods while some euro bulls fled, so net bullish positioning on the euro got trimmed drastically during the week to September 19.
This clearly bearish positioning activity likely showed further bearish bets after ECB Board Member Benoit Coeure gave a speech in which he suggested that the ECB may decide to prolong its loose monetary policy to offset the further strengthening of the euro when he said that “policy will remain more accommodative for longer, thereby likely muting further the pass-through of any growth-driven exchange rate appreciation.”
Aside from that, bearish positioning on the euro also likely reflects how large players reaction to September 19 Reuters report that cited “six sources” who have “direct knowledge of [the ECB’s] thinking,” since that report cited one of the sources as saying that “The strength of the euro is the number one problem” for the ECB because its deflationary effect on cheaper imports.
The sources cited in the Reuters report also alleged that ECB member were divided, “on whether to set a definitive end-date for their money-printing program when they meet in October, raising the chance that they will keep open at least the option of prolonging it again.”
That’s obviously similar to what Coeure said, which implies that Coeure’s comment may be the general thinking among the ECB members.
Net bearish positioning on the pound was reduced substantially during the week ending on September 19, thanks to the drastic trimming of net shorts on the pound, as well as some fresh longs on the pound.
Positioning activity very likely shows pound bears running away in defeat and fresh bulls jumping in because of the most recent BOE statement, wherein the BOE reaffirmed its hiking bias while hinting that the BOE may be hiking soon when the minutes noted that “A majority of MPC members judge that … some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”
Bullish positioning on the pound was also very likely driven by the unexpected revelation that BOE MPC Member Vleighe has joined the hawkish camp after he said in his September 15 speech that “the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise.”
Moreover, Vlieghe implied that when the BOE does hike, then that would only be the first hike in a hiking cyclen when he said that ““It’s obviously more than unwinding last August (when the BoE cut rates). We are making that judgment over a three-year period, so it will depend on how the data evolves.”
However, BOE Governor gave a September 18 speech. And while Carney reaffirmed the BOE’s hawkish bias, Carney also stressed that “Any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent,” which seems to contradict Vlieghe’s comment that hinted at more rate hikes.
Moreover, Carney said that “monetary policy has to move in order to stand still,” which implies that the BOE hawkish bias is partly motivated by the desire not to get left behind.
Anyhow, Carney’s not-quite-hawkish comments did not really seem to have a major effect on positioning activity. Or maybe they did, since there was a massive reduction in pound shorts but the increase in pound longs was much lower.
The yen continued to push back against the Greenback. And a closer look at positioning activity show that yen bears pared their bets while yen longs added to theirs a bit.
This rather bullish positioning activity is actually kinda weird since there were rumors that Japanese PM Shinzo Abe may call for a snap election. And we now know that that these rumors had substance because Abe really did call for a snap election.
Getting back on topic, bullish positioning on the yen was also weird because bond yields were climbing at the time, which should have dampened demand for the yen.
Anyhow, the weird positioning on the yen probably shows preemptive positioning ahead of the BOJ statement, just in case the BOJ decides to announce plans to exit its super loose strategy, or tweak its monetary policy framework, or remove its easing bias at the very least.
However, we now know that the BOJ decided to maintain its current monetary while maintaining its easing bias.
As has been the case in the previous weeks, net change in positioning on the Swissy was only very minimal. And a closer look shows that positioning activity was also very minimal, which implies that interest in the Swissy was only very minimal.
What’s weird, however, is that the SNB announced its policy statement at the time. And while the SNB maintained its current monetary policy, it also changed its assessment on the Swissy from “significantly overvalued” to “highly valued”. However, that didn’t seem to entice Swisst bulls to come in, probably because the SNB continued to threaten that it would remain active in the forex market to weaken the Swissy.
Sentiment on the Aussie finally improved. However, positioning activity shows that net bullish bias on the Aussie increased mainly because Aussie shorts trimmed their positions. Although there was a smaller increase in Aussie longs as well.
Aussie bulls reinforced their position and Aussie bears fled from theirs, likely because of Australia’s latest jobs report, since it revealed that 54.2K jobs were generated in Australia, which is the biggest job gain since October 2015. Moreover, jobs growth was fueled mainly by the 40.1K increase in full-time jobs.
Aside from Australia’s jobs report, it’s also very likely that relieved Aussie bulls added to their positions while disappointed Aussie bears unwinded theirs when the latest RBA meeting minutes didn’t really say anything drastically new or dovish, other than the usual warning that “A further appreciation of the Australian dollar would be expected to result in a slower pick-up in growth and inflation.”
Incidentally, iron ore prices actually slumped rather hard at the time because poor Chinese data dragged steel prices down. However, that didn’t seem to entice Aussie bears to jump in or scare Aussie bulls away. But then again, the large decrease in Aussie shorts may also show unwinding and/or profit-taking by Aussie shorts in response to the iron ore slump.
Positioning activity on the Kiwi was clearly bearish since large players reduced their Kiwi longs while adding to their Kiwi shorts. And this bearish positioning activity very likely reflects election-related jitters since polls at the time, showed that the race between the National Party and Labour Party was too close to call.
However, do note that New Zealand’s general election is now over and we already know that the National Party had the most votes but was unable to capture the majority of seats and must form a coalition government, which is viewed as a source of political uncertainty.
Non-commercial forex traders became more bullish on the Loonie since they decided to add to their Loonie longs. Loonie shorts did increase as well, but the increase was only minimal.
The increase in Loonie longs likely reflects stronger oil prices at the time because of expectations that demand for crude oil will increase since U.S. oil refineries were restarting their operations after disruption by Hurricane Harvey. Moreover, OPEC forecasted that global demand for oil will pick up, which also gave oil prices a boost and likely stoked demand for the Loonie.
Aside from higher oil prices, positioning activity also likely shows preemptive positioning ahead of Canada’s CPI and retail sales report in the hopes that they’ll continue to support future rate hikes.
Of course, we now know that the headline reading for Canada’s July retail sales report was better-than-expected (+0.4% vs. +0.2% expected). However, the core reading failed to meet expectations (+0.2% vs. +0.4% previous) because 5 out of 11 retail store types reported declines in sales during the month of July.
As for Canada’s August CPI report, we now know that the headline readings rose by +0.1% month-on-month and +1.4% year-on-year, which are below the expected readings of +0.2% month-on-month and +1.5% year-on-year.
However, we also know that two of the BOC’s three preferred measures for underlying inflation printed further improvements.
Interestingly enough, Loonie bulls were apparently not fazed by BOC Deputy Governor Timothy Lane’s September 18 speech wherein he talked about the negative effects of a strong Loonie on Canada’s exports.
Lane even said that the BOC “will be paying close attention to how the economy responds to both higher interest rates and the stronger Canadian dollar.” But, again, that didn’t seem to faze Loonie bulls that much and Loonie bears didn’t really boost their shorts all that much either.
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.