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The value of net long positions on the Greenback for the week ending on January 26, 2016 was trimmed from $25.03 billion to $23.85 billion, which is a three-month low, according to calculations done by Reuters. In addition, the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost mainly to the euro and the yen, which has been the theme for the past few weeks.

Keep in mind that these numbers show the net positioning of non-commercial traders against the U.S. dollar. 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.

CFTC COT Forex Positioning (Jan. 26, 2016)
CFTC COT Forex Positioning (Jan. 26, 2016)

Lemme break down the latest numbers for y’all:

  • Net bullish bets on the yen soared to a three-year high of 50,026. This was primarily due to another jump in long positions on the yen, increasing from 84,485 contracts to 92,628.
  • The euro continued to take some ground from the Greenback, with large speculators trimming their bearish bets on the euro from 206,464 contracts to 198,661 while simultaneously increasing their bullish bets from 69,449 contracts to 71,446.
  • The Swissy was finally pushed into the red after three weeks of winning out against the U.S. dollar. The bearish push came mainly from a jump in the number of Swissy shorts from 24,285 contracts to 29,435.
  • Large speculators pushed the pound deeper into bearish territory by pumping up their short positions on the pound from 76,442 contracts to 82,233.
  • Non-commercial forex traders moderately trimmed their net bearish bets on the Aussie but increased their net bearish positions on the Kiwi. As for the Loonie, net short positioning on the Loonie only saw a slight increase.

Last week’s signs of firming up in Greenback demand was just too good to be true since net long positions on the Greenback lost another good chunk. The continuing deterioration in Greenback demand was likely due to the Jan. 20 release of poor U.S. CPI readings, with headline CPI printing a 0.1% month-on-month decrease instead of remaining stagnant as expected. The core CPI reading took a small hit as well, dipping to 0.1% from 0.2% previous.

And that, together with other poor economic reports such as the slowdown in Q3 GDP (2.0% vs. 3.9% previous), probably made forex traders doubt the sustainability of the U.S. Fed’s tightening cycle all the more. As a result, forex traders probably speculated that the U.S. was likely gonna present a less hawkish tone in their Jan. 27 FOMC statement. And we now know that was the case.

The low-yielding euro and the safe-haven yen also continued to take even more ground from the Greenback, probably because of the prevalence of risk aversion during the week ending on Jan. 26, with risk appetite only making a comeback on the day itself. In the Japanese yen’s case, most forex traders and economists alike were expecting the BOJ to maintain their monetary policy, so the BOJ’s decision to introduce negative rates during their Jan. 29 decision was a surprise to many. As such, it is therefore highly likely that we’ll see a drop in yen demand in the upcoming COT forex positioning report.

As noted earlier, risk aversion was the dominant sentiment during the week ending on Jan. 29. Still, the safe-haven Swissy wasn’t getting a lot of buyers. There were no clear reasons for the lack of demand, but it’s possible that non-commercial forex traders were none too happy with the drop in Switzerland’s trade balance from 3.16B CHF to 2.54B CHF, given that it was expected to increase to 3.33B CHF.

Moving on, the increase in short positions on the pound was most likely due to continuing disappointment over BOE Guv’nah Mark Carney’s January 19 speech wherein he said that “now is not yet the time to raise interest rates” and that “not enough cumulative progress has been made to warrant tightening policy.” And it certainly didn’t help that the Guv’nah reiterated these views during his testimony to the Treasury Select Committee.

As for the other currencies, the increase in Kiwi shorts was likely due to preemptive positioning ahead of the RBNZ rate decision and statement while the reduction in bearish bets on the Aussie was likely prompted by the largest open market cash injection from the PBoC in three years, which probably improved sentiment on the Aussie a bit, given Australia’s semi-dependence on exports to China. The lack of major changes on Loonie positioning, meanwhile, was likely due to the BOC’s decision to maintain rates despite forecasts of a rate cut, as well as a recovery in oil prices.

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.