Weekly COT Analysis: USD Supported But EUR Shorts Pared

Data in this report cover up to Tuesday Dec 2 & were released Friday Dec 5, encompassing the U.S. Thanksgiving holiday but not the ECB or Nonfarm Payrolls.

• Sentiment is USD bullish. Traders maintained their large $49bn net position, holding the USD long against every currency. Week over week changes were minor – potentially reflecting the impact of the Thanksgiving holiday.
• The net short EUR position (-$24.7bn) narrowed to the smallest holding in 7-weeks, suggesting a stabilization in sentiment. A break below $24bn would be more concerning, warning of profit taking on shorts.
• The stability in CAD & AUD sentiment this week highlighted investors’ comfort with maintaining their existing short positions ahead of high level event risk for both currencies. With CAD held short $1.6bn and AUD held short $3.5bn, the gap between the two hints to the magnitude of investors’ concerns related to both.
• Bearish sentiment toward JPY has deteriorated for the fifth consecutive week, widening to an $11.7bn net short position that is rapidly approaching the near $14bn levels from September. The closing of long positions suggests a capitulation and hints at the potential for further deterioration given the continued decline in spot to fresh multi-year lows.

EURUSD OutlookBearish

Summary: The market had positioned for a more doveish stance at the latest ECB meeting, and the central bank failed to meet stretched expectations. The central bank kept a dovish tone, aggressively lowering its inflation forecasts, with scope for even further downward revisions if oil prices remain soft, and explicitly mentioned it is considering further unconventional measures. The ECB stance and the potential for quantitative easing  coupled with the robust labour data out of the US on Friday kept the Euro pressured into the close. The market clearly maintains a medium term bearish view which may be subject to further short term volatility as player take end of year profits on positions

Strength and Index indicators continue pulling back from extreme low levels, Momentum crosses and highlights the potential for the near term fading of downside pressure


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GBPUSD Outlook –  Bearish

Summary:  GBPUSD remains under pressure due to increasing fiscal and political uncertainties. The latest OBR budget revised borrowing higher, suggesting that the UK could have to enact growth dampening austerity measures in the future. Political uncertainty could also influence foreign portfolio inflows in 2015, further adding to pressure on GBP.

Strength consolidates at very depressed levels with Index indicators at lows supporting bearish continuation, Momentum ticks up from lower levels suggesting slower progress short term.


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USDJPY Outlook – Bullish

Summary: Polls are suggesting that Abe will take a landslide victory in the upcoming elections, which should boost USDJPY with the prospect of further stimulus measures to follow. Market remain JPY bears against USD, as expectations are for Abe’s policies to be successful, increasing the risk appetite of Japanese investors. However, should reforms progress slower than the market anticipates, JPY could outperform on the crosses. What’s more, any concerns about global risk appetite would also offer support to JPY.

Strength ticking back up, Index bullish and elevating. Momentum retreats from recent highs.


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USDCHF Outlook – Bullish

Summary: Now that the Swiss gold referendum is out of the way, the focus will return again to the inflation outlook and possible monetary policy response. We will be watching the CPI print this week, since any undershoot could increase market speculation of further monetary easing at the upcoming SNB meeting, now that there isn’t a constraint that could have come from the referendum outcome. Market remains bearish on the CHF, also given that it often trades with the EUR reflected in the inverse price action of the EURUSD and USDCHF.

Strength and Index indicators consolidate at highs suggesting trend continuation. Momentum ticking to the upside from last week’s convergence.


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AUDUSD Outlook – Bearish

Summary: Despite some respite in iron ore prices (Australia’s second largest export), the AUD continues to decline. We remain bearish since economic indicators are weakening, such as 3Q GDP undershooting market expectations, inflation expectations are falling and subsequently rate cut expectations from the RBA are starting to be priced into next year. As market expectations for a rate cut increase this would support the markets bearish view. Market will also be keeping an eye on commodity prices as these support bearish AUD.

Strength and Index at retreat from recent very low levels, Momentum consolidates at lows, bearish trend remains supported for now.


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USDCAD Outlook – Bullsih

Summary: The BoC delivered a slightly more hawkish statement than markets had anticipated this week. The most important comment was the bank’s assessment that ‘the output gap appears to be smaller’ than projected at the last meeting. As such, this implies an earlier hike than markets were previously expecting. The BOC also acknowledged recent data strength.

Strength and Index remain bullish but retesting recent high prints, Momentum also retesting recent highs supportive of continuation in broad bullish trend.


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