According to calculations done by Reuters, large speculators further slashed the value of their net bullish bets on the Greenback from $4.50 billion to just $135 million during the week ending on July 3, 2017. This is the first time since April 2016 that the value of net long positions on the Greenback fell below the $1 billion mark.
Moreover, the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost ground against everything, with the sole exception of the yen.
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 July 3, 2017.
The Greenback lost ground pretty much across the board and a quick look at positioning activity shows that short positions against the other currencies got culled, with the exception of the yen since short positions on the yen ramped up instead.
This implies that positioning activity was driven by Greenback bulls pulling out of their short positions.
So, what happened during the week ending on July 3 that scared many Greenback bulls away?
Well, as Pip Diddy noted in his weekly recap for the June 26-30 trading week, there was a perceived shift in central bank biases because of ECB President Draghi’s June 27 speech, which was viewed as hawkish overall, as well as BOE Governor Carney’s June 28 speech and BOC Governor Poloz’s June 28 CNBC interview, which were also deemed as hawkish.
These perceived shifts in central bank biases, plus low expectations for a December rate hike (at the time) and uncertainty because of Trump, apparently eroded overall demand for the Greenback, according to market analysts.
Other than that, positioning activity likely showed unwinding by Greenback bulls ahead of the FOMC minutes since rhetoric from Fed officials after the June FOMC statement were mixed, with some Fed officials expressing concern about low inflation.
And as it turns out, the minutes of the June FOMC meeting revealed that Fed officials were already split on their outlook for inflation and the future implication for the Fed Funds Rate during the June meeting itself.
However, expectations for a December rate hike got revived because of the July 7 NFP report, but the most recent NFP report does not yet reflect how large players reacted to both the FOMC minutes and the NFP report.
Again, positioning activity was driven mainly by Greenback bulls getting crushed. Even so, there were major events, reports, and other catalysts for the other currencies, and here they are:
The euro saw the largest decrease in short positions, as well as a decent influx of fresh longs during the week ending on July 3.
And this very bullish positioning activity very likely showed continued expectations of future tightening after ECB President Draghi’s June 27 speech.
Interestingly enough, ECB Vice President Constancio’s more cautious tone during a June 28 CNBC interview was not enough to weaken optimism for the euro.
And the same can be said of the June 28 Bloomberg report which cited unnamed ECB officials as saying that the market may be “hypersensitive” and could have misjudged Draghi’s hawkish tone.
Do note, however, that positioning activity does not yet reflect how non-commercial forex traders reacted to the July 6 release of the ECB’s meeting minutes since the minutes revealed that ECB officials also discussed removing the easing bias on the ECB’s QE program during the June monetary policy meeting. Although we already know that they ultimately decided to keep their easing bias because they don’t think the recent rise in inflation is sustainable.
Like the other currencies, the pound also lost some shorts. And while that helped to improve overall sentiment on the pound, what really drove the net change in positioning was the large increase in fresh long on the pound.
And this increase in pound longs very likely reflects how large speculators reacted to BOE Governor Carney’s June 28 speech, which was pretty hawkish overall, especially the part where Carney said that “some removal of monetary policy stimulus is likely to become necessary” while speaking for the BOE as a whole.
This contrasts with Carney’s more dovish June 20 comments wherein Carney said that he personally does not yet think that it’s time for a rate hike.
Aside from Carney’s hawkish rhetoric, positioning activity also likely reflects relief after the Conservatives and the DUP were able to hammer out a deal and then successfully pass the Queen’s Speech.
Do note, however, that positioning activity does not yet fully reflect the string of disappointing PMI reports, as well as poor “hard” data, namely the fall in the U.K.’s industrial output and wider trade deficit, which both point to a potentially slower GDP growth in Q2.
The yen was the odd one out because it was the only one that saw a massive influx of fresh shorts.
The increase in yen shorts was very likely due to speculation that the BOJ would step in to put a lid on rising JGB yields due to surging global bond yields at the time.
And the surge in bond yields, in turn, was blamed by market analysts on the perceived shifts in central bank biases since that caused expectations of future tightening to ramp up.
Of course, we now know that the BOJ did step in by announcing unlimited bond purchases on July 7, which caused the yen to depreciate further against its peers.
As for the increase in yen longs, that was likely due to the fact that risk aversion was actually the more dominant sentiment during the week ending on July 3.
Sentiment on the Swissy improved mainly because of the reduction in Swissy shorts, so it’s probably safe to say that overall sentiment on the Swissy improved mainly because sentiment on the Greenback soured.
There was a reduction in Swissy longs, though, which may be due to profit-taking since the Swissy has been appreciating in tandem with the euro.
Also, it’s possible that the paring Swissy longs may have been due to speculation that the SNB would be stepping in to dampen the Swissy’s recent rise.
Large players slashed their bearish bets on the Aussie while pumping up their bullish bets.
The continuing increase in net bullish bias on the Aussie was likely due to another rise in iron ore prices (at the time). Although it’s also possible that non-commercial traders were betting that the RBA would be more hawkish during the July 4 RBA statement.
Of course, we now know that the RBA maintained a very neutral monetary policy bias during the July 4 RBA statement. Worse, the RBA even removed its forecast that “economic growth is still expected to increase gradually over the next couple of years to a little above 3%.”
Also, positioning activity does not yet reflect how traders reacted when iron ore prices started to slump on July 4.
Like the Swissy, overall sentiment on the Kiwi improved mainly because Kiwi shorts got slashed.
As to why Kiwi longs eased a bit, that was likely due to speculation that the surge in bond yields would reduce the Kiwi’s own yield advantage, dampening demand for the Kiwi in the process. Also, risk aversion was the dominant sentiment at the time.
The Loonie’s advance against the Greenback is relentless, as large players added to their Loonie longs while cutting down their shorts.
This bullish positioning on the Loonie very likely reflects increased rate hike odds from the BOC after BOC Governor Poloz gave his hawkish views during a June 28 CNBC interview.
Also, oil was on the rise at the time because U.S. oil production fell, which likely helped to improve sentiment on the Loonie as well.
Positioning activity does not yet reflect oil’s later slump, though. Positioning activity also does not yet reflect how large speculators reacted to Poloz’s rather hawkish interview with Handelsblatt Global on July 4.
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.