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According to calculations done by Reuters, large non-commercial forex traders slashed the value of their net bearish bets on the Greenback for the second straight week from $6.19 billion to $4.19 billion. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback was able to push back against all its forex rivals, especially the Aussie dollar.

Keep in mind that the numbers below show the net positioning of non-commercial forex 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 (May 17, 2016)
CFTC COT Forex Positioning (May 17, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback took some ground from ALL its forex rivals.
  • Just like last time, the Aussie printed the largest net absolute change in positioning, thanks to Aussie longs getting cut down significantly from 82,774 contracts to 71,792 while Aussie shorts were increased from 44,616 to 46,900.
  • Non-commercial forex traders increased their bearish bias on the pound mainly by pumping up their short bets on the pound from 72,563 contracts to 75,955.
  • Net absolute change in positioning on the euro was minimal, but the Greenback was able to push back against the euro a bit, thanks to short bets on the euro increasing from 123,149 contracts to 124,310.
  • Like the euro, net absolute change in positioning on the yen was also minimal, but a closer look at how positioning went down shows that both yen bulls and yen bears were paring their positions, but it just so happens that there were slightly more bulls who were abandoning ship than bears.
  • The same positioning activity occurred on the Loonie, but substantially more Loonie longs were getting trimmed, with long bets on the Loonie getting slashed from 42,040 contracts to 37,009 whereas short bets on the Loonie were only reduced from 16,166 to 14,303.
  • Large speculators were less bullish on the Swissy, and they showed this by increasing their bearish bets on the Swissy from 15,757 contracts to 18,316.
  • They were also less bullish on the Kiwi, and they expressed their deteriorating bullish sentiment by reducing their bullish bets from 33,573 to 32,545 while increasing their short bets from 24,221 to 25,857.

Large speculators reduced their bearish bias on the Greenback for the second straight week as of the week ending on May 17, 2016. Returning demand for the Greenback was likely being fueled by renewed expectations of a rate hike in June and preemptive positioning ahead of the May 18 release of the minutes of the April FOMC meeting.

If y’all can still recall, the April FOMC statement didn’t provide any forward guidance on when the next rate hike will likely be, but rhetoric from Fed officials after that were mostly positive and supportive of a June rate hike, such as the May 3 remarks, from Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, with Lockhart saying that there’s “more probability” of a rate hike “being a real option” for the June monetary policy meeting.

In addition, economic reports released during the week ending on May 17, 2016 were also very positive overall. Retail sales in April, for example, expanded at a significantly faster pace than was expected (+1.3% vs. +0.8% expected, -0.3% previous). As another example, the headline CPI reading for April increased at a faster-than-expected rate (+0.4% vs. +0.3% expected, +0.1% previous).

Returning demand for Greenback came at the expense of its forex rivals, with the Aussie getting the worse of it. There were likely other factors in play that caused net bullish sentiment on the Aussie to deteriorate as much as it did, though.

One such factor is that non-commercial forex traders were pricing-in the likelihood of future rate cuts from the RBA. If y’all can still remember, the May 6 release of the RBA’s Quarterly Statement on Monetary Policy, stated that “The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time,” which means that RBA is ready and willing  to doing more if needed after already cutting rates back on May 3.

However, the May 17 release of the May RBA meeting minutes showed that RBA officials were worried that “the lower-than-expected CPI outcome could not be explained entirely by temporary factors,” which forced them to downgrade their inflation forecasts. The RBA added “if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth.” In short, the RBA is worried that the poor readings for CPI are not temporary, but are due to lower wages, which opens up the possibility of more easing down the road if poor inflation readings persist.

Another factor weighing down on demand for the Aussie was the slide in iron ore prices due to the China’s introduction of measures to limit speculative trading activity. Oh, for those of ya who don’t know, iron ore is a major Australian export, so falling iron ore prices hurt Australian mining companies which then hurts the Australian economy as a whole.

Moving on, another currency worth mentioning is the pound because large speculators increased their bearish bias on the pound, likely because of the weaker-than-expected April CPI reading (+0.3% vs. +0.5% expected, +0.5% previous). However, the pound was the best performing currency by May 20 because of positive Brexit-related developments.

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.