The latest CFTC data on the Commitments of Traders (CoT) shows some important moves in the positioning of speculators.
Australian dollar (NYSE:FXA)
While the price of iron ore plunged, bullishness on the Australian dollar (FXA) remained surprisingly strong. I am almost equally surprised to see this bullishness now in full scale retreat as iron ore attempts a relief rally off a 7-month low. Over the last two weeks, the net long contracts held by speculators dropped to near zero.
The price of iron ore is trying to recover from a 7-month low and a 3+ month plunge.
Speculators in the Australian dollar (FXA) have cut net positioning to near zero. Speculators have not been bearish in over one year, so the current retreat is notable and significant.
I am still bearish against the Australian dollar and expect a lower currency once the reality of “lower for longer” iron ore prices settles in. While I have a standing short in the form of long AUD/JPY, I have recently cycled in and out of long EUR/AUD given my bullishness on the euro.
EUR/AUD has shot up sharply since a 4-year low in March. Yet, I think there is still plenty of upside left – at least to 1.56.
Euro (NYSE:FXE)
Speaking of the euro, the switch to bullish sentiment may be in its early stages. Speculators increased net longs from the previous week’s switch from bearish to bullish positioning. Given the weight of bearishness suffered by the euro since 2009 combined with a likely turn in economic prospects and monetary policy, I think a sustained switch is underway that could drive the euro to much higher levels over time. Against the U.S. dollar, the euro has effectively erased its post-election losses. I am still in a buy-the-dip and sell the rally mode on EUR/USD. Playing the current uptrend channel has happened to turn into a major winner.
Euro speculators extended net longs from the previous week’s historic switch in sentiment. The euro has suffered a very extended run of bearishness – is there now a lot of pent-up demand for euros?
Add the euro to the still growing list of financial assets that have erased the impact of the U.S. Presidential election (EUR/USD).
The British pound (NYSE:FXB)
The British pound has been going strong ever since Prime Minister Theresa May announced a snap election for June with the goal of solidifying her grip on power and gaining more leverage in Brexit negotiations. That major breakout caught me completely flatfooted; I was holding a sizeable position where I TWICE turned down small profits in exchange for the expectation of a much bigger payoff on a short GBP/USD position (yet another lesson learned!). I thought the strength would be fleeting. Instead, the pound has steadily drifted higher.
The torture of dripping water has worn down the patience of speculators net short against the British pound. The last two weeks have delivered a full-scale retreat by pound bears. I am still holding a small amount of shares in CurrencyShares British Pound Ster ETF (FXB). I am currently short the pound in forex with small positions. I intend to hold through the June election where I expect at minimum a sell-the-news event before the pound steadies itself for the next run-up.
Bearishness against the British pound (FXB) has hit a wall. Net shorts were last this low a year ago, just ahead of the Brexit vote.
The British pound (FXB) is holding its breakout against the U.S. dollar (GBP/USD).
Note well that May’s election announcement marked the most recent LOW for EUR/GBP, the currency pair I consider the true value test for the British pound given the context of Brexit.
The Canadian dollar (NYSE:FXC)
Oil has rallied sharply since the lows of early May. That low also marked the high for USD/CAD. The subsequent sell-off surpassed my expectations, so I found myself without a short position as USD/CAD broke through 50DMA support. At the time of typing I got back into a short position ahead of the upcoming OPEC meeting.
Oil prices seemed to have stabilized and OPEC meets later this week. Yet, speculators set a fresh historic highs on net short positioning against the Canadian dollar (FXC).
The Canadian dollar broke through 50DMA support on USD/CAD.
Be careful out there!
Full disclosure: net short the U.S. dollar, long FXB, short the British pound, short AUD/JPY, short USD/CAD