Large players resumed trimming their net favorable bets on the Greenback, with the value of net longs bets falling from $13.5 billion to $8.32 billion during the week ending on May 23, according to the latest calculations by Reuters.
And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost ground to most of its peers, although the euro continues to stand out.
Oh, please keep in mind that the numbers below show the net positioning of non-commercial forex traders against the U.S. dollar.
And 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 May 23, 2017.
Demand for the Greenback took a broad-based hit during the week ending on May 23, 2017. And that was likely due to the media-induced mass hysteria over Trump’s supposed links to Vladimir Putin’s Russia.
If you can still recall last week’s write-up, I noted that positioning activity during the week ending on May 16, 2017 already reflected the market’s reaction to the Washington Post article that accused Trump of revealing highly classified information.
However, I also noted that positioning activity did not yet reflect the Comey memo wherein Trump supposedly asked Comey to stop the investigation on Flynn.
Also, positioning activity back then likely did not yet fully reflect Trump’s tweets where he admitted that he did share certain relevant information for fighting terrorists with the Russians while stressing that he has the right to do so as the U.S. President.
And these catalysts, which sparked fears that Trump’s growth-oriented policies may get delayed, or that Trump may even be impeached, caused U.S. dollar spot and futures, U.S. equities, and U.S. bond yields to weaken bigly.
Anyhow, here are the major events, reports, and other catalysts for the other currencies:
Sentiment on the euro continued to improve for the fifth week in a row, thanks to fresh euro longs and another round of reduction in euro shorts.
This very bullish positioning activity was likely induced by the ECB’s meeting minutes since it revealed that ECB officials may change to their tune as early as the June meeting because the minutes noted that:
“At the forthcoming policy meeting in June, new staff projections, alongside further data and analyses, would become available, putting the Governing Council in a better position to take stock and reassess the sustainability of the recovery and the outlook for inflation.”
“Looking ahead, it was suggested that, if the euro area recovery kept up its momentum and progress was made in attaining a sustained adjustment in the path of inflation, due consideration would need to be given to adjusting the present formulation of the Governing Council’s forward guidance.”
Other than that, demand for the euro was likely sustained by German Chancellor Angela Merkel’s remark that:
“The euro is too weak — that’s because of ECB policy — and so German products are cheap in relative terms.”
Moreover, the Euro Zone and its member states got mostly positive low and mid-tier data at the time, which likely helped to sustain demand for the euro.
It should be noted, however, that positioning activity does not yet show how large players reacted to ECB Draghi’s May 24 speech wherein he reminded the market that some areas of the Euro Zone are still in a tough spot.
“Our current assessment is that there is no widespread emergence of imbalances, but there remain some localised areas that require continued close monitoring and vigilance.”
The pound took even more ground from the Greenback, marking the sixth week of Greenback retreat against the pound. However, a closer look at positioning activity shows that the pound advanced against the Greenback mainly because pound bears were unwinding their bets, although there were a few fresh long bets on the pound.
Strangely enough, positioning activity already reflects Brexit Secretary David Davis’ comment in a Sunday Times interview that the U.K. needs “to be able to walk away” from the negotiating table.
It is possible, however, that the U.K.’s positive (on the surface) jobs report and the better-than-expected retail sales report scared away some pound bears while pound bulls were holding fast despite the negative catalysts, which resulted in the net bullish positioning activity.
Anyhow, just note that positioning activity does not yet reflect the downgrade to the U.K.’s Q1 GDP growth, as well as the revelation that the biggest drag on trade was net trade and not consumer spending.
After three weeks of getting pushed back by the Greenback, the yen finally did a little pushing of its own, thanks to the reduction in yen shorts.
As mentioned earlier, the media-induced mass hysteria over Trump’s supposed links to Russia caused the U.S. dollar, U.S. bond yields, and U.S. equities (global equities as well for that matter) to weaken bigly.
In other words, the soap opera in Washington ignited severe risk aversion. And this caused yen spot and futures to appreciate, which likely sent yen shorts scurrying away in fear.
The Swissy advanced against the Greenback, thanks to fresh Swissy longs outnumbering the fresh shorts. And demand for the Swissy during the week ending on March 23 was likely due to the prevalence of risk aversion at the time.
The Aussie lost ground to the Greenback for the eighth consecutive week. A closer look at positioning activity, however, shows that both Aussie bears and Aussie bulls were actually unwinding their bets. More Aussie bulls were abandoning ship, though, which is why the Aussie continued to lose ground to the Greenback.
Aussie bulls were likely jumping overboard because of the severe risk aversion brought about by all the Trump-related drama. Although it’s also possible that net negative data also weakened demand for the Aussie, namely Westpac’s consumer sentiment index falling by 1.1% in May and the Q4 2016 reading for Australia’s wage price index getting a downgrade.
As to why Aussie bears were unwinding their bets, that was likely due to profit-taking by bears who took preemptive shorts, although it’s also possible that rallying commodities (at the time) scared some bears away.
Net positioning activity on the Kiwi was rather bullish because Kiwi bulls reinforced their position while Kiwi bears pared some of their bets.
As mentioned a few times already, risk aversion prevailed at the time, which should have dampened demand for the Kiwi. However, positioning activity is not as strange when you consider the possibility that Kiwi bulls were betting on a positive Fonterra report, as well as New Zealand’s trade report printing a bigger surplus in April.
Of course, we now know that Fonterra upgraded its milk payout by 15 cents to $6.15 per kilo while forecasting an even bigger payout rate of $6.50 in the next season. New Zealand’s trade surplus in April, meanwhile, widened to $578 million, which is the biggest trade surplus since March of 2015.
Positioning activity on the Loonie was similar to that of the Aussie in that Loonie bulls and Loonie bears were both slashing their bets. And like the Aussie, more long bets on the Loonie got culled, resulting in the Loonie taking a step back against the Greenback for the 12th consecutive week.
Positioning activity probably shows unwinding of bets ahead of the OPEC meeting. And we now know that OPEC extended its oil cut deal but failed to surprise the market, which caused oil to tank as a result.
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.