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

Looking through the percent rank table, the biggest change that jumps out is that WTI positioning has moved out of the range lows (oversold) for the 3-month and 1-year timeframes. We warned of a potential sentiment extreme in last week’s report, with net-long exposure sitting at a 13-year low. A closer look at the data reveals that large speculators have reduce short exposure and increase net-longs, and prices have since risen to an 11-week high.

Yet positioning for three key markets remained at range extremes.

• GBP futures were at their 100 percentile for 3-month, 1-year and 3-year timeframes which warns of a bullish extreme. And that was before UK data revealed hot wages data and saw fresh bets of a 50bp BOE hike last week, and a hot CPI report on Thursday risks further upside for GBP.
• Positioning for Japanese yen futures remain at bearish extremes for all three timeframes, although the bullish price action seen last week suggests the BOJ may already be intervening in the markets
• The 2-year note is also at 0% (bearish extremes) for all three timeframes but it seems likely some shorts were shaken out in the second half of last week

Commitment of traders (forex) – as of Tuesday 11th July 2023:

• Net-long exposure to GBP futures rose to a 15-year high (gross longs highest since April 2018)
• Large speculators were their most bearish on JPY futures in over five years
• Net-long exposure to the US dollar index (DXY) fell by -2.3k contracts, its fastest weekly pace in 11
• Traders remained net-long CAD futures for a second week (but only marginally)

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

We had warned of a potential sentiment extreme for yen futures positioning ahead of last week’s selloff. When so many traders are on the same side of the trade, the odds increase for a sharp price reversal. And we selloff on USD/JPY as yen bears closed their JPY shorts did not disappoint. The chart shows yen positioning but it is inverted to correlate with the USD/JPY chart. Therefore a positive number shows net-short exposure and a negative numbers means futures traders were net-long yen.

The rally on USD/JPY stalled at 145 before printing a small bearish week, but prices accelerated lower after the COT report was compiled on Tuesday, which means we’re likely to see evidence of gross shorts on JPY being closed and potentially JPY futures longs being opened in next week’s report.

As the rally on USD/JPY was in three waves, it is possible we’re in a wave C of a larger ABC correction. It is interesting to note that a 61.8% Fibonacci projection lands around 130, which makes it a viable target for bears. But if this is wave C of an ABC correction, it must break to a new cycle low. The 100% projection (wave equality) is just above the 120 handle.

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

The British pound is going from strength to strength as economic data keeps the hawkish pressure on the BOE to hike by 50bp at their next meeting. Hot wages data last week send GBP pairs higher once more, and another hot CPI report this week could send the pound higher still. However, net-long exposure to GBP futures is at a historical extreme looking back to data since late 2007. And that suggest an increased risk to a volatile reversal – and a soft inflation report could be the ideal (and much welcomed) catalyst. However, it is worth noting that net-long exposure reached nearly twice the level we see currently, so it really depends which extreme we want to use to decide whether GBP bulls are pushing their luck.

Commitment of traders (indices, bonds) – as of Tuesday 11th July 2023:

• Net-short exposure to the 2-year note hit a fresh record high, although softer CPI and PPI reports likely saw some short-covering in the second half of last week
• Large speculators were their least bearish on VIX futures in 13-weeks, which implies an expectation of higher volatility (rom very low levels)
• Nasdaq futures traders were net-long fort a thirteenth week
• Net-short exposure to S&P 500 futures remained mostly unchanged around their least bearish level in 15 weeks

Commitment of traders (commodities) – as of Tuesday 11th July 2023:

• Net-long positioning for gold among large speculators and managed funds remained largely unchanged on the week, although open interest is rising overall and prices have since rallied higher
• The sharp rally on silver futures prices also suggests that net-long exposure will have increased since Tuesday’s report
• Large speculators were their least bullish on platinum futures in 18 weeks

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