Weekly COT Report: Euro Bears Pull Back After Draghi Disappoints

Trading Themes: USD remains soft ahead of this week’s FOMC meeting. An adjustment to the EURUSD policy divergence picture fuelled further USD selling midweek with the Dollar index back below its July highs. Full focus now turns to the upcoming rate decision with CME pricing an 83% probability of lift-off. USD ended the week lower as retail sales on Friday came in below expectations at 0.2% vs o.3% expected. Thursday’s rate decision will be the key driver of the currency space trading outlook this week.

  • EUR: Inflation expectations took another hit post the ECB meeting, will likely weigh on Euro
  • GBP: Domestic data to demonstrate a lack of price pressures in the UK economy keeping the BOE sidelined                                                                                                   
  • JPY: FOMC then BOJ meetings to drive trade this week
  • CHF: In line with other central banks SNB mark down inflation expectations for 2016/17
  • CAD: Seven year lows in WTI Crude hammering the CAD
  • AUD: RBA meeting minutes likely a non-event as Governor Stevens ‘chills’ over Christmas

Let’s take a look at what the latest COT report data is showing us from a trend and net change week over a week perspective…

  • EUR bearish, decreased on the week
  • GBP bearish, decreased on the week
  • CHF bearish, flat on the week
  • JPY bearish, decreased on the week
  • AUD bearish, decreased on the week
  • CAD bearish, flat on the week

EURUSD – Outlook Bearish

The single currency, which was sharply stronger as markets reacted with disappointment to the ECB’s latest policy adjustment, extended gains last week following comments by ECB’s Nowotny which suggested that further ECB easing is not a sure thing, causing a further unwinding of EUR shorts. Domestic data focus is on final Nov CPI and PMI data sets.

COT Indicators

  • Strength active sell signal, ticks up
  • Index active buy signal, ticks up
  • Momentum active buy signal, ticks down

LFOrder Flow Trader BullishE1

GBPUSD – Outlook Bearish

Sterling was sharply higher last week as investors paired downside risk ahead of the Bank of England’s December meeting, expecting that the Bank might soften its recent Dovishness. Upside was fuelled also by an improved NIESR GDP estimate which beat came in above expectations of 0.5% at 0.6%. The BOE however retained their recent Dovishness, noting the subdued inflation outlook stemming from continued Oil price declines, seeing GBP lower except against the embattled commodity currencies. Domestic focus this week is on CPI with traders keen to see if Oil prices are having an immediate negative effect.

COT Indicators

  • Strength active buy signal, ticks up
  • Index active buy signal, ticks up
  • Momentum active buy signal, ticks up

LFOrder Flow Trader BearishG1

USDJPY – Outlook Bullish

The Japanese Yen was higher last week supported by safe-haven inflows. The tumbling Chinese Yuan, continued slide in Oil prices, and weaker equity markets alongside a softer Dollar have all contributed to higher demand for the Japanese Yen which is supported also by a reversal in easing expectations as investor no longer anticipate further BOJ easing this year. Domestic focus this week is on BOJ monetary policy statement and Kuroda conference with traders keen to see if BOJ remains confident on economic outlook heading into the year end.

COT Indicators

  • Strength active buy signal, ticks up
  • Index active buy signal, ticks down towards convergence
  • Momentum active sell signal, ticks down

LFOrder Flow Trader Bearishuj1

USDCHF – Outlook Bullish

SNB stayed on hold at its policy meeting. The 2017 inflation forecast was revised downwards from 0.4% to 0.3%, while the central bank still expects inflation to overcome the 1.0% threshold in mid-2018. The central bank reiterated that the Swiss franc remains ‘significantly overvalued’.

COT Indicators

  • Strength active buy signal, ticks up to test 2015 highs
  • Index active buy signal, consolidates at 2015 highs
  • Momentum active buy signal, at 2015 highs

LFOrder Flow Trader Bearishuchf1

AUDUSD – Outlook Bearish

Aside from a mid-week rebound as the US Dollar was sold, the Aussie was lower last week as commodity currencies were hit amidst a risk off tone. Even a further decline in the Australian unemployment rate, which beat expectations of 6% to print 5.8%, was unable to stem the losses as price tracked Oil lower across the week. Domestic focus will be on the RBA’s Dec meeting minutes release.

COT Indicators

  • Strength active sell signal, ticks up
  • Index active buy signal, exit short positions and enter long positions at Fridays close or better
  • Momentum active sell signal, ticks up towards convergence

LFOrder Flow Trader Bearisha1

USDCAD OutlookBullish

The Canadian Dollar, which is weighed upon by divergent policies between the Bank of Canada and the US Federal Reserve, was a further victim of the continued Oil price declines last week. The near-term domestic economic outlook combined with continued Energy weakness have left the Canadian Dollar  one of the worst performing currencies of the year, fuelling expectations of a further BOC rate cut to come. Traders will be paying close attention to CPI on Friday for signs of energy price induced damage.

COT Indicators

  • Strength active buy signal, ticks down
  • Index active buy signal, ticks down
  • Momentum buy signal, ticks down towards convergence

LFOrder Flow Trader Bullishucad1