Weekly COT Analysis: Broad USD Support Strengthens

Traders continue to build bullish USD positions, driving the net position to a fresh high of $45.7bn; however the bulk of this is still held against EUR, which at $28.1bn makes up 62% of the total USD position.

However all currencies are now held net short against the USD; highlighting a broad USD positive sentiment.

• Bearish sentiment toward EUR appears to be gaining renewed momentum, with this week’s $1.7bn widening in the net short the largest week on week build since early August, helping to narrow the distance from the $33.5bn record short from June 2012.
• For JPY, there has been limited change in the $7.9bn net short position. However, this conceals a considerable amount of risk and near term vulnerability as gross long and short positions rose $1.5bn and $1.8bn, respectively week on week.
• The deterioration in AUD sentiment has continued albeit modestly for the 9th consecutive week, providing for a cumulative $7.9bn swing from the $4.5bn long in early September. The shift has been relatively swift and highlights ongoing vulnerability for AUD, a contrast to the $2.5bn swing for CAD over the same period

GBPUSD Outlook – Bearish
The Bank of England stayed on hold at this week’s meeting. Only a few months ago, a November rate hike was a viewed as a distinct possibility by the market. However, as the pace of data strength has tempered and central banks elsewhere have turned more doveish, the first BoE rate hike is likely to come much later than markets had anticipated. As a result, GBP should continue to weaken against the USD.

Index & Momentum indicators are still firmly at lows indicating continued bearishness. Price has registered new cycle lows and Strength has continued to decline and confirms the bearish cross from the 10th of October.



USDCHF Outlook – Bullish
Bullish price action on the USD, growth in the US relative to the rest of the world, which result in capital inflows into the country. Upside break of previous highs suggests further scope for upside development.

Indicators remain bullish and elevated signalling that the market is still very bullish on this pair and trend continuation is highly probable.



USDCAD Outlook – Bullish
Bank of Canada governor Stephen Poloz has stopped giving forward guidance on interest rates and appears content to let the CAD fall in an effort to boost exports.This move was countered on Friday with a robust domestic jobs report causing the Canadian dollar to gain against the U.S. dollar as the greenback weakened and oil moved higher.

Strength, Momentum & Index indicators are all still firmly to the upside here having recently crossed higher supporting trend continuation.



EURUSD Outlook – Bearish
Draghi has delivered once again, sending a dovish message to markets that should keep EUR pressured in the medium term. Draghi commented on the size of the central bank’s balance sheet in the statement rather than in the Q&A, illustrating that it was a consensus view that the ECB’s balance sheet will grow over the next two years, while the Fed’s balance sheet stagnates. This differential should keep EURUSD offered and the EUR acting as a funding currency.

Indicators remain depressed at bearish levels suggesting trend continuation to the downside.



AUDUSD Outlook – Bearish
Price action remains bearish on the AUD. Increased volatility has reduced the carry appeal of the currency. Commodity prices continue to decline, especially iron ore, which affects Australia’s terms of trade. Economists have downgraded their outlook for growth and pushed back their expectation of the first rate hike from the RBA. The combination of this with a stronger USD suggests further downside for AUDUSD.

Indicators remain bearish, initiated new short exposure on a new cycle lows.



USDJPY Outlook – Bullish
The BoJ easing and the GPIF announcing higher allocation into foreign equities and bonds caused USDJPY to move from 108 to almost 115. While there could be some further JPY weakness as the market was neutral on JPY before the event. JPY sentiment has reached extreme bearish levels, which when previously reached caused a counter trend rotation may develop before higher prices are printed.

Strength remains bullish here, however caution is advised as Momentum is waning here and Index has crossed to the downside.