Weekly COT Analysis: Volatility Returns

Volatility returned with a vengeance this week. There is clearly a growing nervousness in financial markets. The sharp decline in equity markets and rally in US treasury bonds this week had an overall impression of panic and roiled FX markets accordingly. While the outlook for the Eurozone continues to deteriorate (supported by weak German industry data), the overall view for global economic growth remains stable, although moderate.

USD position increased as traders added to already long positions, driving the net long to $43bn. COT data implies that the market is increasingly bearish EUR, CHF, CAD, AUD and GBP. Traders hold their largest net short against EUR and added to it this week, driving it to $25bn; however market participants are far more cautious on GBP holding a relatively flat net short of just -$0.3bn.

Investors are now bearish commodity currencies. AUD sentiment is the most bearish, with a $2.6bn short position resulting from six consecutive weeks of deterioration. The $1.4bn net short CAD position is relatively more modest, having deteriorated for five consecutive weeks.JPY sentiment is bearish with a large $11.8bn net short position driven by fundamentals. However, JPY remains vulnerable to short covering in periods of risk aversion, a development that has provided for a $2.0bn narrowing in the net short over the past two weeks

GBPUSD Outlook – Bearish

GBP seems to be in the midst of a period of uncertainty as positioning evens out. With analysts beginning to differ around time scales for a BoE rate hike and the Fed registering a more doveish tone, Cable.has continued to come under pressure as markets pushed back the first rate hike from the BoE. Inflation disappointed, coming in at 1.2%Y. This is much below the BoE’s 2%Y target and, while wages are rising, they are at historically low levels. Both these facts suggest to the markets that the BoE may keep rates low for a bit longer. The political risks are also building, which may reduce foreign investment.

Indicators reflect the bearish to neutral positioning with the Momentum index poised to make a potentially bullish cross we have tightened trailing stops on existing short positions to sit above last weeks highs. Awaiting a new signal.

$GBPUSD (Daily)  23_04_2014 - 20_10_2014

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USDCHF Outlook – Bullish

Market positioning is still convincingly long with Net positioning firmly to the upside. In addition to this, Non-commercial CHF positioning shows CHF longs to be at their lowest levels of 2014 suggesting clear upside for the pair.

Trailing stops on long term longs have been triggered protecting accrued profits. Whilst indicators remain bullish momentum is waning and we await a new signal or a break of highs to establish new longs. We remain bullish on USD and see the recent setback as providing a buying opportunity. Falling inflation expectations and weaker activity data have pushed equities and USD lower.This week the CPI print will be important.

$USDCHF (Daily)  18_07_2014 - 20_10_2014

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USDCAD Outlook -Bullish

The Loonie is consolidating at highs and posted new highs this week where we added to long exposure as per our ‘trading view’ with Momentum moving higher in line with strength, our anticipation is for further USD upside. Some interesting bearish rejection candles noted on new high prints suggest we need to tighten trailing stops to lock in profits on our long term positions.

$USDCAD (Daily)  05_05_2014 - 20_10_2014

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EURUSD Outlook – Bearish​

We remain bearish on EUR, since inflation expectations continue to fall, economic data from Germany is coming in weaker and the ECB continues to remain accommodative, beginning asset purchases in the coming weeks. Record ETF outflows have been seen out of Europe in the past week, suggesting that there could be further EUR weakness.

With Net positioning still orientated heavily to the downside, shorts remain intact with the NFP low as the current target amidst a longer term bearish overview. We will add to shorts on a Daily close below last week’s low print. We view the current price action as corrective and continue to look for a retest breach of the NFP low print with added confirmation coming form the potential for a bearish cross in the Momentum Index.

$EURUSD (Daily)  02_05_2014 - 20_10_2014

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AUDUSD Outlook – Bearish

With Net-Positioning, Strength and Momentum indicators remaining pressured to the downside our short positions retain intact with an initial target of the NFP lows. AUD becomes vulnerable in a risk-off environment. This is on top of the weak fundamentals from the country. As iron prices continue to fall on expected weakness in Chinese growth, there are downside risks for the large iron ore exporter. The RBA continues to talk down the currency and sound dovish, which prevents upside for AUD. Stops have been trailed down to sit above the Mid September 91 area high.

$AUDUSD (Daily)  28_05_2014 - 20_10_2014

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USDJPY Outlook – Bullish

Further deterioration of risk appetite could be a near-term supporting factor for JPY. We believe that JPY weakness is no longer in the interest of the Japanese authorities, who worry that falling real disposable income growth may undermine Japan’s recovery. Although we saw price break recently consolidation lows, Net Positioning remains bullish although we have seen a reduction in positioning from recent elevated levels. Trailing stops on long term positions have been triggered to lock in profits. A Daily close above the current highs will signal entry for new long positions.
$USDJPY (Daily)  30_04_2014 - 20_10_2014

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