EUR/USD, USD/JPY, GBP/USD analysis: Commitment of traders report (COT)

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Traders were their most bullish on the US dollar index futures contract in 43 weeks. Gross longs rose to a 35-week high and gross shorts remains steady. However, as the US dollar has just had its second longest weekly winning streak on record of 11 weeks (the record was 12 in 2014),and last week’s bearish pinbar suggest its rally is at least set to pause, if not retrace.

A notable increase in short bets has seen net-long exposure to EUR/USD futures fall to a 49-week low. However, as EUR/USD fell for 11 consecutive weeks ahead of last week’s bullish pinbar above support, perhaps it is time for a bounce.

GBP/USD flipped to net-short exposure for the first time in six months as bears placed bets that the Bank of England have reached their terminal rate.

Net-short exposure to the 2-year bond note reached a new record high, although bond prices remain above 101, a level it has not traded beneath this century.

Net-short exposure on AUD/USD futures has decreased for two weeks since reaching a record level of net-short exposure at the end of September. However, longs only increased by a modest 3.3k contracts and shorts fell by a mere -1.5k contracts.

Net-short exposure to NZD/USD futures have fallen by around two thirds over the last two weeks, with gross longs rising 8.2k contracts over that period whilst shorts were reduced by -5.23k contracts.

Traders have increased their bearish bets on US indices over the last couple of weeks, with asset managers increasing their longs and reducing their shorts.

 

Commitment of traders – as of Tuesday 3^rd October 2023:

 

EUR/USD (Euro dollar futures) – Commitment of traders (COT):

EUR/USD narrowly escaped a 12th consecutive losing streak, although a record had already been set the week prior on its 11^th bearish week. My 1.05 bearish target was achieved and at one stage it appeared on track to tap 1.04. However, a post-NFP recover helped EUR/USD print a bullish pinbar week, and it suggests we may be in for a technical bounce given it fell over -7% in a relatively straight line.

Traders remain net long, although the rise of short bets has seen net-long exposure fall to a 49-week low. In fact the 19.7k short contracts added last week was the most aggressive increase of bearish exposure in four months. Still, it seems the decline of EUR/USD is in need of a pause, if not a bounce higher. But if it is to stand any chance of a recovery, we’d likely need to see US bond yields retrace meaningfully form their highs.

 

USD/JPY (Japanese yen futures) – Commitment of traders (COT):

We saw some excitement on USD/JPY last Tuesday when it fell ~280 pips after it briefly rose above 150. The finger was quickly pointed at the Bank of Japan (BOJ), although they have neither confirmed not denied that they intervened. This differs from October when they were quick to intervene, so perhaps they didn’t. Either way, it served as a reminder that 150 is a threshold markets are all closely watching.

Gross-short exposure among large speculators rose to a 5-year high, which dragged net-short exposure close to its 5-year high. However, asset managers trimmed their gross-short exposure for a second week, which saw record-short exposure fall for a second week from its record high. With net-short exposure among large speculators also warning of a sentiment extreme and volatility erupting around 150, bulls may want to be cautious around these highs. However, in all the while that US yields continue to surge and remain at high levels, and the Fed remain hawkish whilst the BOJ remain dovish, it is difficult to construct a decent bearish case for USD/JPY. For now, the best we can do is warn that it may be overbought and due a correction, but we’d prefer to seek bullish setups at lower prices as opposed to fading this rally.

 

GBP/USD (British pound futures) - Commitment of traders (COT):

The British pound has certainly fallen out of favour with futures traders since it became apparent that the Bank of England (BOE) may have reached their terminal rate. Whilst BOE members have since warned that there may be room for another hike, traders are not yet ‘buying’ it. Large speculators flipped to net-short exposure last week, and asset managers net-short exposure rose to a 53-week high.

However, like EUR/USD, GBP/USD has fallen in a relatively straight line and if the US dollar pulls back then it provides the potential for the pound to bounce. Especially if the BOE continue to warn of another hike.

 

Gold futures (GC) - Commitment of traders (COT):

Short exposure among managed funds and large speculators was largely behind the decline of gold futures, as gross longs remained relatively flat. Managed funds flipped to net-short exposure as of last Tuesday, and large speculators were their least bullish in 47 weeks.

However, I outlined a near-term bullish bias last week and that seems to be playing out nicely. A Bullish engulfing candle formed on Friday and the geopolitical events of the weekend surrounding Iran and Palestine has seen a gold regain its safe-haven status, and tapped 1850. From here we prefer to seek dips with the potential for it to head for $1880 or the upper trendline from its bearish channel on the daily chart.

 

S&P 500 futures (ES) - Commitment of traders (COT):

Asset managers have trimmed gross longs and increased their gross short exposure to S&P 500 futures over the past two weeks. They remain heavily net long, but it does raise the potential that we may have seen the peak of this cycle for net-long exposure. And of appetite for risk continues to deteriorate further, we could be looking at the S&P 500 falling back below 4,000 over the coming weeks.

 

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