Financial markets began the week in a quiet fashion as traders anticipate a number of central bank speeches later on in the week from Janet Yellen of the Federal Reserve, Mark Carney of the Bank of England and Mario Draghi of the ECB.
Looking at the recent Commitment of Traders (COT) reports from the CFTC (Commodities and Futures Trading Commission) we see potential contrarian opportunities arising in both gold and the Canadian dollar.
The following COT reports show how non-commercial traders (banks, hedge funds and speculators) are positioned in the markets. Non-commercial traders often become most bullish at market tops and most bearish at market bottoms. This data can often be used to predict market turning points.
Gold
The below COT chart for gold shows how non-commercial traders are only moderately positioned in the metal. In fact, according to the CFTC, non-commercial traders hold only 64,939 contracts of gold as of Friday last week. That compares to a total of over 250,000 contracts in October 2010.
Total positions are not far off their lows and we have seen non-commercial ownership bottom twice recently after hitting the 20,000 net contracts mark.
Clearly, net positions are lower than the historical average here and this points to a bullish period ahead for the precious metal. Also telling, is that the gold price moved lower last month but net positions did not make a new low. According to this data, the bottom in gold way well be in and a new bull phase could be on the way.
The USD/CAD has hit new levels in 2014 with the currency touching a high of 1.12 last month.
COT reports in the Canadian dollar show that net non-commercial positions have risen in tandem with the latest price moves and indicate that the the currency could be entering an overbought condition.
As you can see from the chart, net non-commercial positions above 50,000 contracts often lead to a period of flattening in the currency (see Mar-Apr of last year). As well as this, the market price has moved well ahead of the net position data.
USD/CAD Net Non-Commercial Position" title="USD/CAD Net Non-Commercial Position" width="474" height="242">
It looks like the Canadian dollar is getting ahead of itself here, and could be due for a sharp correction.