Large players increased the value of their net short positions on the Greenback from $1.91 billion to $3.92 billion during the week ending on July 25, 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 mainly to the Loonie.
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 25, 2017.
The Greenback lost ground mainly to the Loonie. However, positioning activity shows that shorts bets against the other currencies are still getting trimmed, so it looks like Greenback bulls are still broadly unwinding their positions.
As to why Greenback bulls were abandoning ship during the week ending on July 25, that was likely due to the ongoing political drama in Washington.
To be more specific, the GOP’s new healthcare Bill failed on July 18, which apparently reignited worries that Trump’s growth-oriented plans would be delayed even further. In addition, there were rumors floating around at the time that Special Counsel Robert Mueller was planning to expand his investigations into the Trump campaign’s alleged business connections to Russia by investigating Trump’s own business dealings.
Aside from political uncertainty, it’s also possible that large players were speculating that the Fed would sound a bit more dovish in the July 26 FOMC statement.
And we now know that the Fed did sound more downbeat on inflation while using stronger language on its plans to unwind its balance sheet, which caused odds for a December rate hike to drop, dragging the Greenback lower with it.
Okay, here are the major events, reports, and other catalysts for the other currencies:
After four consecutive weeks, the euro’s advance against the Greenback was finally blunted since more euro bulls were bailing out compared to euro bears.
However, it should be pointed out that despite the euro finally getting some push back from the Greenback, net change in positioning was actually only very minimal.
Anyhow, bullish bets on the euro were pared very likely due to profit-taking after the ECB refrained from removing its easing bias on its QE program and Draghi tried his best to sound dovish during the most recent ECB statement and presser.
Do note, however, that while Draghi tried to sound dovish and the ECB kept its easing bias on QE, the ECB statement still showed that the next likely move would be to tighten monetary policy, which is likely why the reduction in euro longs was only limited.
Other than the ECB statement, there was also a Reuters report that was making the rounds at the time, which reinforced the idea that the ECB may tighten monetary policy sooner or later.
According to the Reuters report, which cited unnamed sources “with direct knowledge of the discussion” at the ECB, “the Governing Council discussed Draghi’s speech in Sintra, Portugal, where he opened the door to policy tweaks, and there was agreement to not walk back on that message.”
Moreover, if the ECB does decided to finally make its move, then the October ECB statement would supposedly be the most appropriate time since September is too early while December is too late, according to these unnamed sources.
Net bearish bias on the pound ramped up as fresh pound bears charged in, overwhelming the small increase in pound longs.
Fresh pound bears were likely enticed to jump in by the U.K.’s June CPI report since the readings failed to meet expectations. However, it should be noted that the headline year-on-year reading of +2.6% is still within the BOE’s staff forecast.
BOE Governor Carney even said in a Sky News interview after the CPI report was released that the “big picture” on inflation was essentially unchanged, which is probably why some pound bulls decided to add to their longs positions.
After four consecutive weeks of getting pushed back by the Greenback, the yen was finally able to do some pushing of its own.
However, a closer look at positioning activity shows that both yen bulls and and yen bears were unwinding their positions substantially. More yen longs were liquidated, though, which is why net bearish bias on the yen finally eased after increasing for the past four weeks.
Positioning activity on the yen likely shows profit-taking by yen shorts and yen bulls getting spooked by the latest BOJ statement. After all, the BOJ was forced to downgrade its inflation forecasts yet again, which reinforced the idea that the BOJ won’t be exiting from its loose monetary policy any time soon.
Interestingly enough, the BOJ’s summary of opinions, which is not yet reflected in the most recent COT report, noted that “Although the CPI projections have been lowered, the momentum toward achieving 2 percent is firmly maintained at this point. Thus, additional monetary easing is not necessary and the Bank should maintain the current policy.”
Net bearish bias on the Swiss franc eased a bit, thanks to an influx of fresh Swissy longs and Swissy shorts getting trimmed.
This bullish positioning activity was likely due to the ECB statement. After all, the positive correlation between the Swissy and the euro have been tight recently.
However, positioning activity does not yet fully reflect the Swissy’s severe weakness during the July 24-28 trading week, which was blamed by market analysts on various factors, which include intervention from the SNB, safe-haven trade on the Swissy finally unwinding, and monetary policy divergence (among other things).
Aussie bulls and Aussie bears reinforced their respective positions. The Aussie bulls received more reinforcements, though, so they were able to overwhelm the bears, and so the Aussie’s advance against the Greenback continued for the sixth consecutive week.
Fresh Aussie bulls were likely enticed to jump in by the surge in iron ore prices at the time, as well as the RBA minutes since the minutes were showed that the RBA was rather upbeat on the Australian economy. More importantly, the RBA devoted a significant amount of their discussions on the neutral rate, which market analysts say was interpreted by the market as a sign that the RBA may switch to a hiking bias soon.
As for the increase in Aussie shorts, that was likely due to RBA Deputy Governor Guy Debelle’s July 21 speech since Debelle noted that “No significance should be read into the fact the neutral rate was discussed at this particular meeting.”
After nine consecutive weeks of taking ground from the Greenback, the Kiwi finally took a step back as non-commercial forex traders slashed their Kiwi longs. Traders pared their Kiwi shorts as well. It just so happens far more longs got culled compared to shorts.
The reduction in Kiwi longs likely reflects profit-taking by Kiwi bulls ahead of the FOMC statement since the Fed’s tone may put interest rate differentials into play. Although it’s possible that some Kiwi bulls are still reeling from New Zealand’s disappointing Q2 CPI report.
Long positions on the Loonie had another significant boost while Loonie shorts were trimmed yet again.
The CPI report, in particular, is quite noteworthy since it showed that two of the BOC’s three preferred measures for core inflation finally showed an increase after sliding for several consecutive months, which likely heightened expectations of further hikes from the BOC. After all, the BOC did hint in the July BOC statement that there may be more rate hike to come if the Canadian economy continues to improve.
Aside from positive Canadian economic data, oil was also in rally mode at the time. And the oil rally was attributed by market analysts to signs of slowing U.S. oil output and reports that Saudi Arabia plans to limit its oil output to 6.6 million barrels per day in August.
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.