Look beyond ordinary analysis
The Commitments of Traders (COT) report provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.
This is an essential tool for gauging long term sentiment in futures markets.
The Commitments of Traders Report is issued by CFTC.
It reports all open positions in futures markets of three main groups of traders:
Commercial Traders – Hedgers
Non-Commercial Traders – Money Managers
Non-Reportable – Retail market
The report breaks down each Tuesday’s Open Interest and gives us a powerful view on what exactly the big guys have been doing in the marketplace and what their plans might be.
It is issued every Friday and includes data from Tuesday to Tuesday. The three days prior to the release date are not included.
In this report we cover EURO, GBP, AUD, JPY and we focus on Non-Commercial traders as an indication of profit driven bias.
Another week of summer trading is now over. Some important data was out for major currencies but we didn’t see any major price action.
Inflation and PPI was out in UK last Tuesday. CPI y/y printed 0.5% vs 0.4% expected. This is slightly better number but still far away from BOE inflation target. PPI came out at 1.8% vs 0.9%. The large deviation didn’t affect the price of Pound.
Later on that day ZEW Economic Sentiment was out. The figure showed lowest (negative 14.7) ever. The last time the sentiment printed negative number was in Nov. 2013 ( -2.6).
This shows the overall market instability in post Brexit Europe. It seems like this is going to stay with us for some time. Both EUR and GBP declined.
Later on during the week more UK data was released;
Drahi kept interest rates unchanged and committed to more QE during his press conference last Thursday.
The markets are now going into the summer mode. I expect low trading volume and low volatility in the next two months. This will translate into ranging price action and no clear direction.
The growing expectations over the European Central Bank unleashing further stimulus measures have installed the Euro bears with inspiration. A breach below the stubborn 1.100 support could encourage a steeper decline.
With the UK PMIs weakening, the Brexit impact is beginning to show through in the PMIs and this will drive the Bank of England to cut rates (probably by 25 basis points) in August. Expect a breach of $1.3000 and then a test of the 31 year lows again.
Dovish minutes from the RBA could be preparing for an easier language if not easier monetary policy. This will keep a cap on the gains which have seen an increase in the corrective technical signals. Gravitating back towards the pivot at $0.7400 would be neutral.
BoJ will be the big event to watch next Friday. USDJPY likely to range for the most part. Possibility that the BoJ could come out with a Bazooka next week
Let’s look at Commitments of Traders data. This week’s figures do include positions taken after Friday’s NFP.
USDJPY: Flat/ Turning Bullish
As expected, EURUSD continued to print lower during the past week. The pair closed below 1.10 last Friday. We are now close to “Brexit sell off”, which ended at 1.0915. This is fairly important level for bears. I would expect the current decline to gain some momentum from here onwards.
Looking at speculators, the bearish sentiment continues with even more money moving to the short side of the market.
Speculators added whooping 16K new short positions to their portfolios. This is after they added over 23K fresh short positions over the last two weeks.
At the same time the increased their longs by 4K.
Overall, the picture looks very bearish for EURO Futures. As long as this scenario plays out in the coming weeks, EURUSD might be headed towards 1.03 again.
Cable range traded during last week. Poor economic data and post Brexit uncertainty suggests more pressure to the downside for the British currency.
Carney is expected to cut rates in the next meeting in August, which will add to bearishness.
Speculators dumped 12K of their long positions and added 2.2K new shorts.
They hold least long positions since September 2013.
This is clear bearish sign and it looks like speculators are preparing for interest rate cut and another leg down in this market.
One thing worth noticing.
As of now speculators are extremely bearish in GBP futures.
There were few instances in the past where speculators reached similar level of bearishness.
In each case, the price rebounded and gave a beginning to new major trend in opposite direction. See the screenshot below.
In each instance speculators held around 50% of total open interest in positions at one side of the market.
As of this week, speculators hold 102K short positions vs 225K of total open interest. This accounts for almost 50%.
With so much uncertainty around Brexit, it could be the case of “ buy them when there is a blood on the streets”
As everything suggests more downside, its worth noticing that most of the market is already on the short side and there could be only a small supply of new sellers left. This kind of dynamic caused prices to reverse in the past.
Aussie, as expected was printing lower during the week. There were rather dovish tones delivered by RBA and a talk of an interest rate cut.
Interesting to see that speculators don’t buy into the short run decline and are leaning towards long side of the market.
Last week they added another 15K new long positions. This is on the top of 12K added in the previous week.
As of now they hold 61K long contracts, compared to 33K at the beginning of July. They doubled their longs in under 3 weeks.
At the same time their shorts have not changed in the last 3 weeks.
My best strategy would be to buy dips to build longer term positions.
Huge volume of long contract suggests the bullish outlook among smart money and the prices should climb higher in the coming weeks.
USDJPY continues to climb. The pair closed the week above 106 mark. The sentiment noted in the previous week continued.
Speculators dumped 5.5K longs and added 2.6K shorts. They are now less bullish on JPY futures that in the previous weeks.
Similarly to GBP futures, speculators are extreme bullish in JPY futures.
The last time we saw such a level was in January 2012. This was a beginning of a massive rally which lasted for years.
New parliament in Japan and the promise of extreme QE could be a good catalyst to spark the price reversal.
I will be looking for speculator adding longs in huge quantities in the next few weeks to confirm the sentiment.
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2,481 total views, 12 views today