Large non-commercial forex traders further pared the value of their net bullish positions on the Greenback from $135 million to just $62.5 million during the week ending on July 11, 2017, according to the latest calculations done by Reuters.
And the latest Commitments of Traders forex positioning report from the CFTC shows that the Greenback lost ground against everything yet again, losing the most ground to the Loonie. However, another massive influx of fresh shorts against the yen was able to mask this broad-based souring of sentiment on the Greenback.
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 11, 2017.
The Greenback was pushed back pretty much across the board yet again. And looking at positioning activity, we can see that short positions against the other currencies got trimmed once more.
And like in the previous week, the yen was the only exception since short positions on the yen dramatically increased instead. This implies that positioning activity was driven by Greenback bulls pulling out of their short positions yet again.
Positioning activity already reflects how large players were positioned in the wake of the FOMC minutes and cautious rhetoric from Fed officials ahead of Yellen’s testimonies on July 12 and July 13.
And as you all should know by now,, the minutes of the June FOMC meeting revealed that Fed officials were actually split on their outlook for inflation and the future path for the Fed Funds Rate, even though Fed officials voted to hike in June and Fed Chair Yellen communicated during the June FOMC presser that factors weighing down on inflation were only “one-off” or temporary.
As to what Fed officials had to say ahead of Yellen’s testimonies, Fed Governor Lael Brainard implied that she was worried about inflation and would only support gradual hikes during her July 11 speech.
Philadelphia Fed President Harker shared the same views during a July 11 Wall Street Journal interview while Minneapolis Fed President Kashkari explained in a July 11 interview why he didn’t vote for the two previous hikes and likely won’t do so in the near future.
Of course, we now know that Yellen herself made a U-turn on inflation when she hinted at a lack of confidence in the Fed’s inflation forecasts by saying the following during her testimonies:
“We’re watching this [weak inflation] very closely and stand ready to adjust our policy if it appears the inflation undershoot appears consistent.”
Yellen also implied a slower path to hiking when she said the following:
“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”
Like in the previous week, positioning activity was driven mainly by Greenback bulls deciding to abandon ship. But like last time, there were also major events, reports, and other catalysts for the other currencies.
Euro bulls reinforced their position while more euro bears fled, although the number of short bets that got culled were much smaller compared to the previous week.
Anyhow, this bullish positioning activity likely shows continued optimism on the euro due 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.
Do note, however, that positioning activity does not yet reflect how large players reacted to the Wall Street Journal’s July 13 article that reinforced expectations of an ECB tightening when it cited unnamed sources as saying that Draghi will supposedly present a more hawkish message at the Fed’s Jackson Hole Symposium in August.
Net bearish bias on the pound continued to ease. However, a closer look at positioning activity shows that both pound longs and pound shorts were slashed during the week ending on July 11. It just so happens that more shorts called it quits than longs.
The trimming of pound shorts likely had more to do with Greenback bulls pulling out of their positions. But it also likely shows changing sentiment and/or profit-taking by pound shorts amid expectations that the BOE may be hiking sooner or later.
As for the reduction in pound longs, that was likely due to the U.K.’s manufacturing PMI, construction PMI, and services PMI all missing expectations, as well as the disappointing industrial production in May and the U.K.’s wider trade deficit, which will likely be drags on Q2 GDP growth.
In addition, the reduction in pound longs was likely a reaction to MPC Member Broadbent’s July 11 speech wherein he talked about the negative effects of Brexit.
Positioning activity does not yet show how large players reacted to Broadbent’s July 12 interview where he said that he’s looking to hike but is “not ready to do it yet.”
Positioning activity also does not yet reflect the U.K.’s upbeat jobs report and MPC Member McCafferty’s interview with The Times where McCafferty said that he would likely still vote for a hike next time and even added that the BOE should start to think about trimming its own balance sheet.
Like in the previous week, the yen saw a massive influx of fresh shorts. In fact, the fresh shorts during the week ending on July 11 were almost double compared to last time. Unlike in the previous week, however, yen bulls also decided to flee.
This very bearish positioning activity was very likely due to the persistent surge in global bond yields at the time, which finally forced the BOJ to throw in the towel on July 7 and announce unlimited JGB purchases in order to keep the yields of Japanese government bonds (JGB) at around 0% in accordance with its monetary policy framework of targeting bond yields.
The most recent COT report does not yet show how market players reacted when bond yields plunged in the wake of Yellen’s testimonies, though.
Net change in positioning on the Swiss franc was only very minimal. However, it was enough to push net positioning into bullish territory for the first time since the week ending on December 20, 2016.
Like last time, positioning activity was driven mainly by the reduction in Swissy shorts, which has likely more to do with souring sentiment on the Greenback.
And also like last time, there was a reduction in Swissy longs, which may also be due to profit-taking and/or expectations that the SNB may be stepping in, since the Swiss franc has been appreciating with the euro lately.
Non-commercial forex traders decided to slash both their bullish and bearish bets on the Aussie.
As with the other currencies (other than the yen), the paring of short positions on the Aussie was likely due to Greenback bulls getting out of dodge. However, it’s also likely that Aussie bears were getting spooked by the iron ore rally at the time.
As for the trimming of Aussie longs, that was likely due to Aussie bulls pushing the “eject” button when the RBA refused to join the hawkish bandwagon and opted to present a very neutral tone during the July 4 RBA statement. 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%.”
Positioning activity on the Kiwi was pretty bullish because Kiwi bulls added to their positions while Kiwi bears further trimmed theirs.
Rate hike differentials were likely in play here since lower expectations for a Fed rate hike gives the higher-yielding Kiwi an advantage. Bond yields were on the rise at the time, though, which is probably why large players didn’t position to heavily on the Kiwi since higher bond yields means that the Kiwi’s own yield advantage is still lower against certain bonds.
Positioning activity on the Loonie was similar to the Kiwi. However, there were far more fresh Loonie bulls and far more Loonie bears were running for the hills.
Positioning activity very likely shows speculative positioning that the BOC would be hiking after Poloz’s rather hawkish interview with Handelsblatt Global on July 4.
Of course, we now know that the BOC did hike. Not only that, the BOC implied that more hikes are to be expected if the Canadian economy continues to improve.
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.