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The latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback got pushed back across the board, losing a significant chunk of ground against the euro. But more interesting is the fact that the Aussie is now winning out against the Greenback.

Also, the slide in Greenback demand has been relentless since the value of net long USD positions dropped even further from $12.60 billion to $8.31 billion for the week ending on February 16, 2016, according to calculations done by Reuters. This is the lowest reading ever since May 2014. 

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 (Feb. 16, 2016)
CFTC COT Forex Positioning (Feb. 16, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback is still winning out against most of its forex rivals, but it lost some ground to all of ‘em during the week ending on February 16, 2016.
  • Non-commercial forex traders are still net bullish on the yen. They even increased their long bets on the yen from 75,811 contracts to 84,518, easily outpacing the increase in short yen bets from 32,579 contracts to 36,617.
  • The Aussie was finally able to trump the Greenback after losing out to the Greenback since May 2015. The net bullish Aussie bets was actually mostly due to a reduction in short Aussie bets from 69,646 contracts to 63,933.
  • The drastic reduction in net bearish bets on the euro continued. This time, the reduction was mainly due to short contracts on the euro getting slashed from 177,921 to 162,175.
  • Large speculators were less bearish on the Loonie since they trimmed their bearish bets on the Loonie from 79,214 contracts to 74,162 while simultaneously ramping up their bullish bets from 27,279 contracts to 29,077. They did the same for the Kiwi, albeit to a much lesser degree.
  • The lower net bearish bias on the Swissy was almost exclusively due to the number of short contracts on the Swissy getting pared from 27,624 to 24,507.
  • Net positioning on the pound looks almost unchanged on the surface, but a closer look shows that pound bulls and pound bears were both heavily pumping up their positions, with pound longs increasing from 31,025 contracts to 36,512 and pound shorts increasing from 67,325 to 72,767.

Just as in the previous week, Greenback demand was probably suffering from speculation that U.S. Fed Chairperson Janet Yellen would be more dovish in her February 10 testimony before the House Financial Services Committee. And as it turns out, that was exactly the case, thereby crushing the dreams of many interest rate junkies who were still hoping for a March rate hike.

In her testimony, Yellen said that “Financial conditions in the United States have recently become less supportive of growth” and that “higher borrowing rates for riskier borrowers, and a further appreciation of the dollar” could weigh down economic outlook. She also avoided giving forward guidance on a potential March rate hike, saying that she wants “to make clear that monetary policy is not on a preset course.” Moreover, she probably made a few forex traders gasp in surprise when she said that the U.S. Fed “should look at” negative interest rates as a possible monetary policy tool, but she did say that there’s no reason to implement such a tool yet, however.

Yellen’s not-so-upbeat testimony and the rather dovish tone of the January 27 FOMC statement then probably fueled even more speculation that the February 17 release of the FOMC minutes won’t be a happy one. And we now know that the FOMC minutes only confirmed Yellen’s concerns and overall dovish tone.

The Greenback’s forex rivals were quick to take advantage of the Greenback’s weakness, but they were also being affected by specific reports or events. Demand for the Swissy and the Japanese yen, for example, were likely being driven by safe-haven flows due to the prevalence of risk aversion during the week ending on February 16. The lower-yielding euro was also probably benefiting from these capital flows, especially from the squeeze on European equities.

Moving on, the increase in bullish bets and simultaneous decrease in short bets on the Loonie was likely due to heavy speculation that OPEC members would finally agree to a deal to cut back on oil production. Meanwhile, the Aussie’s victory over the Greenback was probably due to an iron ore rally at the time, with iron ore prices hitting 2016 highs. Although it’s also possible that forex traders were betting on upbeat readings for Australia’s jobs report (it wasn’t).

As for the pound, the drastic liquidation of both long and short bets on the pound was likely due to uncertainty on how the Brexit-related negotiations during the February 18-19 EU Summit will go.  Of course, we now know that the negotiations were a success and that a Brexit referendum date has been set.

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.