USD/JPY, WTI Crude Oil Analysis: Commitment of traders report (COT)

Traders remained heavily net-short to Japanese yen futures last week, with large speculators hitting 0% for the percent rank over the 3-month, 1-year and 3-year time horizons. Yet subsequent price action suggests bears have seriously questioned their exposure given the selloff on USD/JPY last week.

Large speculators flipped to net-long exposure to NZD and CAD futures, although in both cases exposure for longs and shorts were reduced (which is not the most compelling of bull cases).

Net-long exposure to GBP future has pulled back from its 9-year high, but only marginally which suggests the pound remains near a sentiment extreme.

Traders remains heavily short the 2-year note (and by a record amount). Which makes sense as short-term rates are highly sensitive to monetary policy which remains defiantly hawkish for the Fed.

Large speculators have been questioning their short exposure to WTI futures, with net-long exposure lifting higher from its 13-year low due to short-covering.

Commitment of traders (forex) – as of Tuesday 3^rd July 2023:

• Net-short exposure to JPY futures rose to its most bearish level in five years
• Large speculators flipped to net-long exposure to NZD and CAD futures (although mostly due to short covering)
• Weekly volume change of net-exposure to forex majors was relatively light last week, all between -5k contracts (JPY futures) and 7.3k contracts (CAD futures).

Large speculators flipped to net-long exposure to NZD and CAD futures last week, although in both cases gross longs and shorts were reduced – and the faster pace of short covering pushed net-exposure into bullish territory (which is not the most compelling of bull cases). With that said, Canada’s strong employment report on Friday could tempt more bulls back to the table ahead of next week’s BOC (Bank of Canada) cash rate decision as they price in another 25bp hike to 5%.

Net-long exposure to GBP future has pulled back from its 9-year high, but only marginally which suggests the pound remains near a sentiment extreme. Whilst this raises the potential for a reversal to the pound’s bullish trend, such indications may be better served as a cautionary tale for bulls as opposed to a green light for bears.

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

We’ve been waiting USD/JPY rise with net-long exposure, fully aware that 145 is a key resistance level which carries the risk so f intervention, and that exposure was also headed towards a likely sentiment extreme. We now we have a bearish engulfing week alongside a double top at 145, with net-long exposure at a 5-year high. The arrows represent the peak in net-long positioning, and whilst it doesn’t always mean a large selloff is due, it at the very least means a pause in trend. And bulls may want to consider this, as it seems likely that USD/JPY has entered a corrective phase, with the potential for it to test the 140 and 138 handles over the coming weeks.

Commitment of traders (indices, bonds) – as of Tuesday 3^rd July 2023:

• Net-long exposure to Nasdaq futures fell to an 11-week low
• Net-short exposure to S&P 500 futures was mostly unchanged, although moved to a 15-week low
• Traders remain heavily short the 2-year note, and by a record amount
• Net-short exposure to the 30-day Fed fund futures contract rose to a 4-week high, to reflect more hawkish expectations from the Fed

Traders remains heavily short the 2-year note, and by a record amount. Which makes sense as short-term rates are highly sensitive to monetary policy. And this tells us that bond markets expect higher levels of inflation and therefor higher interest rates. But the fact that large speculators are net-short by a record amount also means we’re likely much closer to a nasty reversal than we are to the beginning of its downtrend. But it also means that yield curves are likely to remain inverted for a while and continue to flag a global recession.

Commitment of traders (commodities) – as of Tuesday 3^rd July 2023:

• Net-short exposure to palladium futures hit a fresh record high for managed funds and large speculators
• Net-long exposure to platinum futures fell to a 17-week low for large speculators, whilst managed funds flipped to net-short exposure
• Managed funds increased gross long exposure t gold by 13.6% last week (fastest pace in months)
• Large speculators increased short exposure to copper by 10.1% and reduced long exposure by -6.4%

WTI Crude oil future (CL) - Commitment of traders (COT):

Last week’s report showed that net-long exposure to WTI crude oil futures has fallen to a 13-year low among large speculators. Form that metric alone, we could sense that a sentiment extreme could be close. However, we also note that both managed funds and large speculators have reduced their gross exposure two over the past three weeks, and as prices seem to have formed a base around $67. Lower wicks have formed around $67, which forms a higher lower from the YTD low. We also know that OPEC are on standby to support oil prices, so perhaps we could see it head towards $80 over the near-term.

With that said, the bullish case for oil also seems quite weak with demand likely to falter with growth and the concerns over a global recession on the rise once more. But that doesn’t mean it cannot move $5-$6 higher from current levels, especially if the US dollar continues to soften.

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