Weekly COT Analysis: Long USD Profit Taking Contiues

USD bullish sentiment has softened, with Fridays CFTC data marking the fourth consecutive week of a narrowed USD long position. Most of the change has come from closing EUR, JPY, CHF, GBP and AUD shorts. The shift is noteworthy and is an early warning of a potential shift in bullish USD sentiment. All the currencies are still held net short against the USD; however it is noteworthy that CHF, CAD and GBP  all have net short positions smaller than $2bn.

  • The net short EUR position has narrowed to its smallest since July, warning that sentiment towards EUR is turning, even as the currency reached fresh lows today
  • This week’s $0.9bn narrowing in bearish AUD sentiment is the largest in 8 months, pulling the net short position to $2.8bn. A fourth consecutive week of building gross longs highlights a demand for AUD exposure while leaving sentiment vulnerable in the event of a renewed focus on downside risk. Bearish CAD sentiment is modest and unchanged this week at $1.4bn
  • A $1.5bn narrowing in the net short ($9.3bn) JPY position highlights bears’ continued vulnerability to periods of risk aversion,with a second consecutive week of panic-induced short covering


EURUSD OutlookBearish

Summary: The risk off environment has seen positions being unwound and with some of these potentially being funded in EUR, the EUR had gained some short term support at the beginning of the week only to be hit with an FOMC, SNB at the end of the week. The combination of the hawkish FED and the SNB looking to negative interest rates has sent the EUR back to lows. Going into 2015, markets  continue to anticipate a substantial broadening of the ECB’s asset purchasing programme, leading to the EUR being used as a funding currency and investors establishing short EUR positions.

Strength continues to retreat from lower levels, Index indicators ticking up towards with the Momentum bullish cross highlighting the continued potential for the near term fading of downside pressure.

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GBPUSD Outlook –  Bearish

Summary:  Markets remain bearish on GBPUSD. The inflation rate is now at 1% and markets see risks of it falling further especially since oil prices have weakened. While the BOE has suggested that they could look through the low oil prices when deciding when to raise rates, the performance of GBP over the coming months is likely to be increasingly related to politics which markets believe could have a negative impact.

Strength indicator pulls back from recent extreme lows, Index also retreats from recent low levels but Momentum has ticked back down.


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USDJPY Outlook – Bullish

Summary: The JPY continues to be driven by local risk appetite and so there could be support into year end. However the markets medium term bearish view remains. Now that the snap election is out of the way, the focus may turn back to the low inflation and growth outlook. Both of which look weak. At year end, net positioning in the JPY is only moderately short, leaving scope for investors to rebuild short JPY positions going into 2015.

Strength remains bullish but pulling back from recent highs, Index rotating towards neutral. Momentum continues retreat from recent highs.


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USDCHF Outlook – Bullish

Summary:  Market seems to believe the USD correction is likely done aside from any end of year short term profit taking volatility, particularly after the Fed did not put too much emphasis on downside risks to inflation in the FOMC’s press conference. Rather, the press conference focused on the strength of the labour market, which markets took as a more positive sign. While markets look for a Fed hike in 2015, they are expecting easing from many other G10 central banks, which should support the strong USD view. The CHF will continue to trade as a funding currency. The deterioration of Switzerland’s external position continues to be broad based. Moreover, with the SNB adopting negative deposit rates and actively intervening in the FX market, the market expects further CHF downside

Strength retreats from recent highs. Index and Momentum turn negative warning of potential pause or corrective phase in upside advance.

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AUDUSD Outlook – Bearish

Summary:  Having broken below the key 0.82, the outlook for the AUD remains bearish in our view. With China’s economy showing signs of further weakness such as with the HSBC PMI, the external trade environment remains weak for Australia. In addition, markets remain cautious on the macro outlook. Declining commodity prices, especially iron ore, also do not bode well for the currency.

Strength continues to retreats from recent extreme lows, Index pulls back from lows, Momentum remains depressed but ticks up from recent lows.


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USDCAD Outlook – Bullsih

Summary:  Given the sharp decline in oil prices, CAD’s resilience relative to other energy exporters has been impressive. This is particularly because Canada has a more diversified economy and high trade exposure to the robust US economy. Markets remain bearish on the CAD against the USD but are also now starting to see the themes change against the other G10 currencies. Should oil prices remain low then the performance of CAD could be hindered.

Strength and Index remain bullish consolidating at recent high, Momentum also retesting recent highs supportive of continuation in bullish trend and new year to date highs in price.


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