Sept 25-Oct 2: Renewed Conviction to Short the Yen, USD Shorts Dubious Amid Lower OI
Posted on: 02 Oct, 2018
In the following article, based on the Commitments of Traders report, I unpack last week’s change in futures and options positioning. This week, the changes in positioning are not as clear-cut.
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In the following article, based on the Commitments of Traders report, I unpack last week’s change in futures and options positioning. This week, the changes in positioning are not as clear-cut. Other than the bullish trend in the US dollar vs the yen, which shows characteristics of a market growing increasingly bullish, the rest of CoT data shows a major decrease in open interest activity as the price of the US dollar kept declining.
At the same time, there are contradictions between the commercial-side having shifted its focus to higher levels in the forex majors (more bearish the US dollar), and the large specs community, which saw no renewed interest to add positions on the latest sell-off seen in the US dollar. In fact, if we were to combine the changes spotted in total dealers and asset managers, it suggests that the futures and options market is so far not buying into the trend of US dollar weakness to last. If that turns out to be the case, it’d congruent with the current divergence we are seeing between DM economies and US bond yield spreads, with a very obvious decoupling over the last week.
The latest rise saw price capped by 1.17 in a week that exhibited a major decrease in open interest from 612k down to 525k contracts.
The addition of large specs shorts was much more accentuated, with an overall decrease in the net large spec positions from 14k to 5.5k contracts. It reinforces the notion that the major spike on Sept 20th (not captured by CoT data) came partly as stops by large specs got triggered.
Despite the up week in the pair, the net commercial positioning increased from -35k to -25k, which should be interpreted as a bullish sign. When the market rises for the week, if commercials end up accumulating more longs, it means there is a significant shift in valuation in favor of higher prices, otherwise commercial sellers would have been much more aggressive piling into shorts as the price was moving higher, which was never the case.
Total dealers positioning saw little changes, while asset managers turned more bearish the pair, after an increase in the total short positioning from 143k to 137.6k. Overall, the macro trend remains clearly bullish.
Main Takeaways from the Sterling Contract (6B – CME)
The open interest was reduced substantially from 327.8k to 282.7k as the Sterling kept rising by over 150 pips. The absence of new business added tends to be a precursor of a trend that is likely to exhaust.
We saw a major reduction of large spec longs, resulting in a total positioning of -75.1k from -57.2k. These dynamics strengthen the case for the trend to be unsustainable as liquidity tends to dry up and price eventually reverses as was the case last week after a slew of negative Brexit headlines. The picture in leverage funds was more balanced, with no net changes for the week.
The change in commercials comes in stark contrast with the reduction of large spec longs, and gave us an interesting sign that commercial shorts had no appetite to reinstate positions. In fact, the total commercial positioning was reduced by over 20k in a bullish week, which is quite telling of the change in perceptions by commercials expecting higher prices to hedge.
Dealer longs kept increasing from 112k to 121.6k, which is a sign that the interest for Sterling sell-side products kept rising. Meanwhile, asset managers added new short-side business, taking the total positioning to -57.8k from -50.9k.
Main Takeaways from the Japanese Yen Contract (6J – CME)
As the market rose aggressively, the open interest was reduced by over 13k contracts, a sign that the move was mainly driven by a removal of liquidity.
Interestingly, the move higher in the aussie was absent of renewed buying interest by large specs. In fact, longs declined by over 20k while short barely budged.
However, a move that argues in favor of a temporary bottom in place is the major increase in commercial longs, which increased from 68.9k to 94.4k.
Total dealer positioning saw the largest increase this year, currently standing at 100.2k from 81.3k. The more they extend their longs, the more need exist to hedge short-sided business activity via investment products.
Asset managers extended their short bets to the highest we’ve seen this year after adding an additional 8k short contracts.
How to Be Positioned Going Forward?
The clearest signal from last week’s CoT positioning is the renewed commitment to playing USD/JPY longs, hence we should expect dip buying opportunities to pay off as long as the risk appetite conditions stay supported. In terms of the euro vs US dollar, the last technical breakout was not captured by the CoT data, but it all suggests that was driven by a cascade of stops being triggered; in terms of how to position, the latest CoT gave us mixed signals with a market still looking to play shorts but commercials shifting their views into higher levels going forward. In terms of the sterling, the latest Brexit headlines should keep the pressure back lower, with this view in no conflict with the latest CoT data, which showed a major decrease on open interest on the correction higher. Lastly, the Australian dollar may have found a temporary bottom or at least that’s what the latest change in commercials suggest. However, given the overextension to the upside, the immediate risk short term is that the rest of account types, which remains overwhelmingly bearish, manage to revert the current bullish momentum for an eventual retest of the 0.72 level and lower.