The latest Commitments of Traders (COT) forex positioning report from the CFTC and calculations down by Reuters reveal that large players became more bearish on the Greenback since the the value of net short positions on the Greenback shot up to $4.62 billion as of the week ending on January 2 after falling for two consecutive weeks to a low of $460 million.
However, net short positioning on the Greenback was only slightly higher from the $4.28 billion recorded during the week ending on December 5.
And looking at positioning activity, net bearish bias on the Greenback deteriorated mainly because of improving bullish sentiment on the euro and, to a lesser extent, the stronger bullish bias on the pound and easing bearish bias on the Swissy.
Also, one of the main reasons why net bearish positioning on the Greenback fell to a low of $460 million before rising again was the drastic reduction in Aussie longs and Loonie longs.
Oh, please keep in mind that the figures below show 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.
Okay, here is how positioning activity played out on the different currencies during the past six months, but we’ll be focusing on positioning activity between the weeks ending on December 5, 2017 and January 2, 2018.
Net bullish positioning on the euro reached a record high of 127,868 contracts as large players added to their bullish positions while trimming their short positions a bit between the weeks ending on December 5, 2017 and January 2, 2018, which likely reflects continued confidence in the Euro Zone economy, as well as speculation that the ECB may signal a tightening move sooner or later, especially after ECB board member Coeure’s December 31 comment that there’s a “reasonable chance” that ECB’s QE program will not be extended again.
Net short positioning on the Swissy was almost cut in half from 29,567 net bearish contracts to 16,232 between the weeks ending on December 5, 2017 and January 2, 2018. The easing bearish bias on the Swissy was actually driven by a build-up of Swissy longs although the unwinding of short contracts helped as well.
Net bullish positioning on the pound rose from 6,406 contracts during the week ending on December 5 to 16,235 contracts during the week ending on January 2. A closer look at positioning activity shows that both pound bulls and pound bears were actually reinforcing their respective positions. It just so happens pound bulls got more reinforcement. The build-up in both pound longs and pound shorts likely reflects speculative positioning as Brexit talks proceed to Phase 2 this year.
Large players are still net bearish on the yen. Also, net short positioning on the yen increased from 114,267 contracts to 121,766 between the weeks ending on December 5, 2017 and January 2, 2018 as the increase in yen shorts outpaced the increase in yen longs. This means that there are a lot of yen shorts to squeeze out if the BOJ finally does change its tune. And there are signs that the BOJ has or will, such as the “tapered” JGB purchases earlier.
Net bullish positioning on the Loonie got slashed from 42,466 contracts to 14,739 contracts between the weeks ending on December 5, 2017 and January 2, 2018. And this was thanks mostly to long positions on the Loonie getting culled from 66,467 contracts to 49,297, which likely shows profit-taking in the wake of the BOC’s not-so-hawkish December BOC statement. Interestingly enough, bulls started adding to their positions again during the week ending on January, which is before Canada’s strong jobs report revived expectations for another BOC rate hike.
There was a drastic shift in net positioning on the Aussie since net positioning on the Aussie was net bullish by 40,328 contracts during the week ending on December 5, 2017 but became net bearish by 20,026 contracts during the week ending on January 2, 2018. The significant shift in net positioning was largely due to long positions on the Aussie substantially falling from 93,384 contracts to 38,012 between the weeks ending on December 12 and December 19. And this fall may be due to profit-taking ahead of and in the wake of the dovish minutes of the December RBA meeting. Although interest rate differentials may also be in play (at the expense of the Aussie) since after the Fed’s December 13 rate hike.
Sentiment on the Kiwi deteriorated further since net bearish positioning on the Kiwi increased from 12,893 contracts to 16,985 between the weeks ending on December 5, 2017 and January 2, 2018. Both Kiwi longs and Kiwi shorts actually shed some of their positions but far more bulls were calling its quits, likely because of interest rate differentials after the Fed’s December 13 rate hike, as well as monetary policy divergence since the RBNZ isn’t expected to hike until 2019.