EUR/USD, GBP/USD flip to net-short, JPY shorts near record high: COT report

Market positioning from the COT report - as of Tuesday April 23, 2024:

• Large speculators flipped to net-short exposure to EUR/USD futures for the first time since September 2022
• GBP/USD futures traders flipped to net-short exposure to GBP/USD futures for the first time this year
• Large speculators pushed net-short exposure to USD/JPY futures to its second most bearish level on record at -179.9k contracts
• They also pushed net-short exposure to CHF/USD futures to a 5.5-year high
• Positioning for gold futures remained net-long but essentially flat among large speculators and managed funds
• Large speculators pushed net-long exposure to WTIU crude oil futures to a 4-year high

US dollar positioning (IMM data) – COT report:

Asset managers have been on the right side of the ‘long US dollar’ trade all year, with net-long exposure moving in lockstep with prices. Large speculators took the brave (and ultimately wrong) approach of being net-short, in a rare divergence between the two sets of traders. Yet their net-short exposure has diminished to just -213 contracts short, which is surprising given EUR/USD and GB/USD has now flipped to net-short exposure. But with odds favouring no cuts form the Fed this year, and even some making noises of a hike – it seems probable that large speculators may be forced to admit defeat and flip to net-long exposure.

EUR/USD (Euro dollar futures) positioning – COT report:

This has been a long time coming, but large speculators finally flipped to net-short exposure to EUR/USD futures last week. I have noted more than a few times this year that gross longs have been trending higher since Q4 and that long bets have been diminishing for both asset managers and large speculators. And with the ECB set to cut a couple of time this year and the Fed likely hold steady, a lower euro accompanied with more bearish exposure seems feasible. Asset managers remain long by a factor of 3.9 bulls to 1 bear, but that ratio could move a lot lower as the year progresses.

GBP/USD (Euro dollar futures) positioning – COT report:

Large speculators flipped to net-short exposure last week, for the first time this year. We’ve seen a notable culling of long bets alongside a rise in shorts, helped by expectations of two rate cuts this year. But what really clinched the deal was that the BOE (like the ECB) effectively announced that they’re happy to decouple from Fed policy of ‘higher for longer’.

However, net-short exposure among asset managers reached a record high. It is difficult to say whether this likely marks a sentiment extreme given the BIE have not even begun to cut rates yet. But asset managers certainly saw this move coming a lot sooner as they flipped to net-short exposure since September.

JPY/USD (Japanese yen futures) positioning – COT report:

There seems to be no fear in shorting then yen, given large speculators pushed net-short exposure to the second highest level on record last week. And who can blame them? The BOJ and MOF have made feeble attempts to jawbone the currency and remained suspiciously quiet when USD/JPY pushed above the supposed 152 and 155 glass ceiling following strong US inflation reports.

Perhaps the real game here is the ‘race to the bottom’ in regards to their exchange rate. The BOE and ECB effectively confirmed ‘Fed independence’ and are happy to decouple from the Fed’s trajectory and begin cutting sooner. In that light, perhaps the BOJ are more than happy to let the US dollar rip, send the yen broadly lower and win the race to the bottom, even at the risk of inflation.

The risks of a sentiment extreme remain in place, but only if the BOJ get serious about tightening their policy and backing up words of intervention with the real thing. And if they’re going to at all, perhaps today’s test of 160 might given them the green light.

USD/JPY spiked to 160 during low-liquidity trade

It looks like some deep pockets decided to take advantage of low-liquidity trade with Japan on a public holiday, by driving USD/JPY 170 pips higher and tapping 160 for the first time since 1990. The move seems purely speculative - and one that will surely catch the eye of the MOF and BOJ. The question remains as to whether they will actually intervene, give their reluctance to do so despite a relatively volatile bout of yen weakness this year.

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