FX COT Update: EUR Bulls Build Bigger Bets

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This data references the period ending Tuesday, July 18th

EURUSD

Non-Commercials increased their net long positions in the Euro last week buying a further 7.5k contracts to take the total position to 91k contracts. The Euro has been steadily bought over the last month as markets continue to shift their perspective in line with the ECB. Recent commentary from ECB chief Draghi has stoked market expectations that the ECB are on the verge of announcing further tapering measures. However, at the bank’s recent July meeting the ECB seemed to take a small step backward highlighting that the ECB will remain in the market for a long time as early tightening would jeopardise the recovery and although risks are broadly balanced, inflation pressures remain weak.

Given the sharp rally over recent weeks following Draghi’s comments at the Sintra forum it is possible that the bank is trying to temper the markets view to prevent further aggressive appreciation in the exchange rate. Nevertheless, it seems that markets mostly responded to Drahi’s comment that a decision on QE would come at the autumn meeting, which saw EUR rally sharply once more as investors continue to expect further tightening by the bank in the near future.

On the USD side, the key focus this week will be the FOMC although with the event being statement-only, markets are not expecting the Fed to alter its fed funds’ target range. Instead focus will be on the guidance given by the central bank specifically with how they reference the recent fall back in inflation and whether the bank will initiate a reduction in bond reinvestments as outlined on June 14th.

GBPUSD

Non-Commercials reduced their net short positions in Sterling last week buying 7.5k contracts to take the total position to -16k contracts. This latest adjustment marks the third consecutive week of purchases in GBP as short-covering continues to dominate flows.  GBP bulls were left somewhat disappointed this week as a miss in June CPI saw a tempering of rate-hike expectations which have increased recently in line with comments from BOE’s Carney who said that removal of stimulus may be necessary soon. This week the key data focus will be 2Q GDP due on Wednesday which is forecast to have fallen back to 1.7% from 2% prior.

USDJPY

Non-Commercials increased their net short positions in the Japanese Yen last week selling a further 15k contracts to take the total position to -127k contracts. The Japanese Yen continues to be steadily sold with the short positioning reaching a fresh yearly record as investors continue to capitalise on the policy divergence growing between the BOJ and other central banks in the G10.

In an encouraging move for bears the BOJ pushed their inflation target further back at their recent meeting. Low inflation continues to pose a major challenge for the bank who have now pushed back the timing for inflation hitting their target by a year. The key data focus this week will be on CPI due on Friday and expected to remain unchanged at 0.4% in June.

USDCHF

Non-Commercials reversed their net long positions in the Swiss Franc this by selling 4k contracts to take the total position to -4k contracts. Positioning in the Swiss Franc has been fluctuating around the neutral level over the last month as investors await a clear directional catalyst. ECB tightening expectations, US policy agenda and global risks flows continue to be the main inputs for the currency which has been out of the spotlight recently given the strength in EUR which has taken pressure off the SNB.

AUDUSD

Non-Commercials increased their net long positions in the Australian Dollar buying a further 14.5k contracts to take the total position to 51k contracts. Aussie long positions continue to grow as hawkish RBA expectations continue to grow. The recent RBA meeting minutes highlighted that the bank judge a roughly 3.5% rise in the neutral nominal cash rate as necessary to keep inflation capped while boosting growth.

Given the shift in tone by other central banks in the G10, investors judge that the RBA is on the verge of tightening and as data in China has picked up recently, so too has sentiment towards the Aussie. The key data focus this week will be CPI which is forecast to have ticked up to 2.2% from 2.1% in the 2Q.  RBA’s Lowe also speaks on Wednesday after the release of the inflation reading.

USDCAD

Non-Commercials increased their net long positions in the Canadian Dollar last week buying a further 16k contracts to take the total position to 8k contracts. The Canadian Dollar has been steadily bought over recent weeks given the shift in perspective by the BOC which saw them raising rates by 0.25% at their recent meeting.

The bank signalled that further rate increases would be judged on incoming data which has been mixed over the last week with a slight miss on CPI but a strong beat on Retail Sales which keep the focus on a potential October hike. On the data front this week the key focus is May GDP due on Friday which is expected to jump to 4.2% from 3.3% YoY. A print in this region would further encourage CAD bulls.

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