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After six weeks, large speculators are now net bullish on the Greenback again, according to calculations done by Reuters. The value of net bullish bets on the Greenback is currently at $3.73 billion, after being net short by $4.19 billion previously. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback’s net gains in positioning were at the expense of the yen, the Aussie, and the euro.

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 24, 2016)
CFTC COT Forex Positioning (May 24, 2016)

Lemme break down the latest numbers for y’all:

  • The Greenback took even more ground from all its forex rivals, with the exception of the pound.
  • Net bearish bets on the pound got moderately reduced, thanks to short bets on the pound getting pared from 75,955 contracts 71,392, as well as an increase in pound longs from 37,533 to 38,557.
  • The yen had the largest net absolute change in positioning due mainly to yen longs getting cut down from 86,165 contracts to 54,782.
  • The Aussie had the second biggest absolute change in positioning,  and the same positioning activity can be seen since short bets on the Aussie got slashed significantly from 71,793 contracts to 51,712.
  • The euro also saw a rather substantial absolute change in positioning, thanks to euro long getting trimmed from 101,723 contracts to 93,955 while euro shorts were pumped up from 124,310 contracts to 131,850.
  • Large speculators were less bullish on the Kiwi, and they showed this by reducing their long bets on the Kiwi from 32,545 contracts to 30,414.
  • They were also bullish on the Loonie, but looking at how positioning activity went down shows that non-commercial forex traders were reducing both their long and short bets on the Loonie, with Loonie longs getting pared from 37,009 contracts to 32,834 while Loonie shorts decreased from 14,303 to 12,787.
  • The opposite positioning activity was true for the Swissy since long positions on the Swissy increased from 22,463 contracts to 24,884 while short positions increased from 18,316 to 20,930.

As of the week ending on May 24, 2016, large non-commercial forex traders are net long on the Greenback again after six weeks of being net short. Steady demand for the Greenback was very likely due to renewed rate hike expectations after the May 18 release of the minutes of the April FOMC meeting revealed that Fed officials thought that it “would be appropriate for the Committee to increase the target range for the federal funds rate in June.” However, Fed officials also made it clear that a June rate hike would be conditional on three economic conditions, namely signs that there was a pickup in Q2 growth, stronger employment readings, and higher inflation.

Another likely reason for Greenback demand was preemptive positioning ahead of U.S. Fed Chairperson Janet Yellen’s May 27 interview in Harvard. As I noted earlier, the FOMC meeting minutes already revealed that Fed officials were pretty hawkish overall, so speculators were likely betting that the Fed’s Head Honcho was gonna be hawkish as well. Of course, we now know that she was no longer as dovish as before, saying that a rate hike is “appropriate” in the coming months.

Also, the CPI readings for April showed that the headline reading increased by 0.4% month-on-month (0.3% expected, -0.1% previous), which is faster-than-expected. The core reading, meanwhile, ticked higher to 0.2% as expected, but it’s an improvement over the previous 0.1% reading. The CPI readings were obviously released well after the April 26-27 FOMC meeting, and they also meet one of the Fed’s economic conditions that I listed earlier, which probably fueled expectations that Yellen’s gonna be supportive of a rate hike during her interview.

Strong demand for the  Greenback meant that most of the Greenback’s forex rivals were forced to retreat yet again. This time, the Greenback had three major victims: (1) the Japanese yen, (2) the Aussie dollar, and (3) the euro.

The yen’s severe vulnerability to the Greenback, as shown by how positioning activity went down, was likely because of the prevalence of risk appetite at the time, which weakened demand for the safe-haven yen. Talks about possible intervention and jitters during the G7 meeting likely helped to convince yen longs to abandon ship as well.

Moving on, the Aussie bulls were liquidating their positions en masse, probably because of continued disappointment over the May 17 release of the May RBA meeting minutes, which showed that RBA officials were worried that “the lower-than-expected CPI outcome could not be explained entirely by temporary factors,” which could mean underlying problems that may lead to the possibility of further easing down in the future, especially if poor inflation readings persist. Of course, it’s also likely that Aussie bulls were just responding to another round of sliding iron prices.

As for the euro, there was no particular catalyst that could have convinced large speculators to become more bearish, so it was possibly due to continuing uncertainty on how the ECB will act moving forward. Although it’s also possible that forex traders were just responding to the prevalence of risk-aversion by unwinding their euro longs or shorting the lower-yielding euro.

Finally, it’s worth noting that the pound was the only currency that was swimming against the tide since it was the only currency that actually managed to take ground from the Greenback. Weakening bearish sentiment on the pound was likely due to easing jitters over the probability of a Brexit because Brexit-related polls have been mostly supportive of the “remain” camp.

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.