According to calculations done by Reuters, the value of net favorable bets on the the Greenback jumped from $6.56 billion to a six-week high of $9.70 billion, ending two weeks of falling Greenback longs. And the latest Commitments of Traders forex positioning report from the CFTC reveals that the Greenback took ground mainly from the pound, the Loonie, and the Swissy.
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.
Lemme break down the latest numbers for y’all:
- The Greenback took a large chunk of ground from the pound, the Loonie and the Swissy. However, the Greenback also lost ground to the yen, the euro, the Aussie and the Kiwi.
- The Greenback advanced the most against the pound, thanks to the loss of 21,056 pound longs and 7,972 fresh short bets on the pound.
- Similar positioning activity happened on the Loonie, which happened to be the Greenback’s second largest victim. In the Loonie’s case, it lost 22,637 long bets while getting trounced by 5,281 new shorts. Net positioning on the Loonie was pushed into the red after 25 weeks of winning out against the Greenback.
- After five weeks of being in the green against the Greenback, the Swissy finally lost out, thanks to Swissy longs getting reduced by 14,478 contracts, which was very slightly offset by the loss of 109 short contracts on the Swissy.
- Among the currencies that gained buyers at the expense of the Greenback, the yen ranked first, thanks to the yen bulls pumping up their bets by 12,235 contracts, which overpowered the 2,208 increase in short yen bets.
- Large speculators had the same positioning activity on the Aussie, with long bets on the Aussie getting pumped up by 14,349 contracts, easily offsetting the 6,189 increase in Aussie shorts.
- Non-commercial forex traders reduced their net bearish bias on the euro by increasing their bullish bets by 4,794 contracts while simultaneously reducing their shorts by 4,201 contracts.
- They also reduced their net short bets on the Kiwi mainly by paring 1,742 contracts from their short position. However, this was partially offset by the 619 decrease in Kiwi long bets.
Returning demand for the Greenback was likely due to the September FOMC statement. You see, it’s true that the Fed didn’t hike rates (yet again) and they even downgraded their economic projections for this year. Heck, they even downgraded their rate hike projection.
However, the Fed also said that “the case for an increase in the federal funds rate has strengthened.” Moreover, Kansas City Fed Esther L. George was now joined by Cleveland Fed President Loretta J. Mester and Boston Fed President Eric Rosengren in clamoring for a rate hike then and there. And these developments point to a much higher possibility of a rate hike by December, and large speculators were probably positioning themselves for that.
Greenback demand may have been a major factor, given the increase in short bets against almost all currencies. However, overall net positioning activity was mixed so catalysts for each currency were also likely in play.
In the pound’s case, the very large reduction in pound longs and the fresh pound shorts were likely influenced by British Foreign Secretary Boris Johnson’s comment during a BBC interview about starting the negotiations for an actual Brexit “probably in the early part” of 2017. This comment very likely reignited Brexit-related jitters.
And of course, we now know that the British PM Theresa May confirmed this by announcing that her government would be starting the process for an actual Brexit by March 2017, which sent the pound lower.
Meanwhile, the sudden loss of demand for the Loonie that ended the Loonie’s 25-week victory against the Greenback was likely due to uncertainty ahead of the OPEC meeting. Although BOC Governor Stephen Poloz’s September 26 statement about Canada’s economy requiring 3-5 years to recover may have also been a factor. Regarding the OPEC meeting, we now know that OPEC members came up with a plan to cut oil production.
As for the other currencies, the prevalence of risk appetite at the time was likely the reason why the higher-yielding Aussie and Kiwi were able to advance against the Greenback. It’s also the likely reason why demand for the safe-haven Swissy crumbled.
Like the Swissy, the yen is a safe-haven currency as well. However, demand for the yen was likely being fueled by speculation that the BOJ’s new monetary policy framework, which was revealed during the latest BOJ statement, is not enough to weaken the yen. After all, the BOJ did indeed revamp its framework, but it did not actually ease further.
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.