Large speculators apparently resumed paring their net bullish bias on the Greenback, since the the value of net long bets on the Greenback fell from $15.02 billion to a five-month low of $13.01 billion, according to calculations done by Reuters. And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost ground mainly to the Aussie.
Oh, please 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.
And here is how positioning activity played out during the week ending on February 28, 2017.
After raising the value of net long bets on the Greenback during the previous week, large speculators decided to resume culling their net long bets on the Greenback during the week ending on February 28, 2017.
Returning bearish bias on the Greenback was likely due to the release of the minutes of the February FOMC meeting. According to the minutes, “many” Fed officials think that it might be “appropriate to raise the federal funds rate again fairly soon.” However, the minutes also revealed that “several” Fed officials were talking down the strong dollar. Specifically, Fed officials were “concerned about the downside risks to economic activity associated with the possibility of additional appreciation of the foreign exchange value of the dollar.” Aside from that, a stronger Greenback would also pose “downside risks to the inflation outlook.”
The minutes also revealed that the Fed may be unwilling to make a move until Trump gives the details of his plans, since Fed officials “cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.”
Do note, however, that the most recent COT report does not yet reflect Trump’s speech. Also, Fed Governor Brainard’s speech, which is arguably responsible for causing rate hike expectations to surge, is not yet taken into account. And the same can be said for Yellen’s speech.
Also, note that the COT report shows that the Greenback lost substantial ground to the Aussie while having a mixed performance, so positioning activity was therefore very likely being driven by events, reports, and other catalysts specific to each currency as well.
And here are the major events, reports, and other catalysts for the other currencies:
EUR – After getting pushed back by the Greenback for two consecutive weeks, the euro finally did a little pushing of its own. As a result, net bearish bias on the euro fell. However, a closer look at positioning activity shows that both euro bulls and euro bears were actually reinforcing their positions. More longs were added than shorts, though, which is why net bearish bias on the euro eased. And the likely reason why there were more euro longs than shorts is that political uncertainty in continental Europe eased a bit after poll results released on February 26 showed the anti-EU Marine Le Pen would easily lose to her pro-EU rivals in the second round of the French presidential elections.
GBP – The pound lost ground to the Greenback for the fourth consecutive week, as fresh pound shorts overwhelmed fresh longs. And net bearish bias on the pound likely increased because of the U.K.’s revised GDP estimate, since business investment contracted by 1.0% quarter-on-quarter, which is the first contraction in five quarters. Year-on-year, business investment fell by 0.9% instead of rising by 0.2% as expected, thereby marking the the fourth consecutive quarter of annual declines.
JPY – The yen advanced against the Greenback for the ninth consecutive week. However, positioning activity shows that yen bulls and yen bears actually pared their bets. It just so happens that more yen shorts got culled than yen longs. Positioning activity likely shows profit-taking by yen bulls and yen bears getting scared off, thanks to the very hard slump in global bond yields on February 24, due to jitters over political uncertainty in Europe.
CHF – Net bearish bets on the Swissy rose after three consecutive weeks of declines, thanks to Swissy longs getting slashed. This likely reflects profit-taking after the Swissy got a boost from the prevalence of risk aversion at the time.
AUD – Large speculators were really bullish on the Aussie, since they added fresh longs while drastically reducing their short bets. Also, this marks the seventh consecutive week that the Aussie has been taking ground from the Greenback. Positioning activity on the Aussie likely shows speculation that Australia’s Q4 GDP report would show a rebound, or even print an upside surprise after the RBA’s meeting minutes said that the “fall in GDP in the September quarter had reflected some temporary factors.” And as we now know, Australia’s Q4 GDP report did print an upside surprise. Other than that, the bullish positioning activity doesn’t really make sense, since most economic reports at the time were disappointing. Construction work in Q4, for example, fell by 0.2% quarter-on-quarter and 7.8% year-on-year. Capital expenditure in Q4, meanwhile, dropped by 2.1% quarter-on-quarter and 15.5% year-on-year.
NZD – After taking ground from the Greenback for six consecutive weeks, the Kiwi finally retreated, thanks to fresh short contracts on the Kiwi increasing more than the increase in fresh long bets. There were more Kiwi shorts than Kiwi longs, very likely because New Zealand’s trade deficit widened from $36 million to $285 million in January, when it was expected to narrow further to just $3 million. The details of the trade report were more mixed, however, since there were actually positive developments. Capital goods imported, for example, jumped by 8.3% to $68 million, with machinery and plant equipment leading the way, which may boost production down the road. Consumer spending also looked healthy since imports of consumption goods jumped by 6% to $60 million. And these positive details likely enticed some Kiwi bulls, which is why Kiwi also increased.
CAD – Positioning activity on the Loonie is pretty similar to that of the Aussie in that Loonie bulls increased their bets while Loonie bears trimmed theirs. This bullish positioning activity was likely a reaction to Canada’s CPI report for the January period. According to the CPI report, Canada’s headline CPI rose by 0.9% month-on-month after two months of negative readings. This is the fastest rise since February 2015. Moreover, Canada’s headline CPI advanced by 2.1% year-ono-year, which is the best reading since October 2014. More importantly, the 2.1% reading is already above the BOC’s 2.0% inflation target, so speculation that the BOC would a bit more hawkish also probably drove positioning activity. Of course, we now know that the BOC was in a sour mood and downplayed positive economic developments, including the rise in inflation.
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.