Sept 12-18: A Bullish Sterling, Aussie Shows High Interest
Posted on: 18 Sep, 2018
In the following article, based on the Commitments of Traders report, I unpack last week’s change in futures and options positioning. There were rather tepid changes in positioning in the euro and the Japanese yen.
To our Market Insights
If one wishes to gain further insights on how to read the CoT data I publish every week, please read this primer I put together.
Commitments of Traders – Futures & Options from Sep 5th to Sept 11th
In the following article, based on the Commitments of Traders report, I unpack last week’s change in futures and options positioning. There were rather tepid changes in positioning in the euro and the Japanese yen. The sterling, however, provides evidence that a new wave of buyers has come in. Meanwhile, one more week, we saw major interest in trading the Australian dollar as a proxy for risk in China and emerging markets in a broader sense.
As per the euro positioning, market participants were obviously cautious to gain exposure ahead of the ECB, so it’s understandable to have seen open interest reduced. The sterling, even if the BoE policy meeting was scheduled in the coming days, proved again that it’s all about Brexit. The currency found new impetus as the market appears to be growing more optimistic about the UK avoiding a ‘no deal’ scenario. The yen provided very little clues against the US dollar as both currencies are ruled by similar risk sentiment dynamics; the market is not committing for one vs the other. Lastly, the aussie continues to see very rich trading activity, with the overall stance still bearish, although the picture is muddier after the major short squeeze from Sept 12th, a day not captured by the CoT data.
There was an overall reduction in open interest to the tune of about 10k contracts in a week where the contract saw a directionless move. In other words, liquidity was removed off the market amid a 100 pips range between 1.1550-1650.
Both long/short specs closed positions ahead of the ECB policy decision. Longs were reduced by about 5k contracts vs nearly 9k contracts by short specs. What’s notable is the significant decrease in lev fund shorts, down to 102.8k from 122k.
Commercial accounts dialed up their interest, with longs increasing by 10k while shorts saw an additional 14k contracts added. Buy/sell by these account-types assisted in keeping the pair within a contained range amid poor interest.
There was barely any change in total dealer positioning, while asset managers saw a reduction of over 10k contracts, which appears to be a move by macro accounts to limit risks ahead of the ECB uncertain macro policy outcome.
Main Takeaways from the Sterling Contract (6B – CME)
In a week where the sterling rose by over 200 pips, the open interest also saw a push higher of over 9k contracts, which communicates buy-side commitment behind, even if the environment remains extremely dependable to brexit headlines.
Large specs increased their long exposure from 66k to 72k, while about 3.3k shorts held by large specs were closed, going from 132.1k to 129.4k. Lev funds were not as determined, with no net changes by longs, just the close of shorts took place, which helped to fuel the drive higher in the sterling.
The move higher through 1.30 was perceived as an opportunity by commercial accounts to re-engage in short-sided business with impetus, increasing the short exposure by about 14k contracts, while only 5k longs were added.
There was a marginal increase in dealer shorts although the overall picture by this category remains overwhelmingly bearish. The same view applies in the asset managers, with barely any changes within the context of a bearish positioning.
Main Takeaways from the Japanese Yen Contract (6J – CME)
In a week where we saw a V-shape type of move, open interest was higher by a mere 2k contracts, which is a very marginal change in the grand scheme of things.
Both long and short specs increased their positioning by 3k, making the latest changes quite inconclusive as to the preferred market direction. A very similar story can be interpreted by analyzing the lev funds accounts.
Commercial accounts kept the overall positioning unchanged, despite they added new business by over 6k contracts in each direction.
Asset managers and dealers provided very little clues. The former saw longs and short closed by around the same magnitude, while the latter shows no real changes.
Main Takeaways from the Australian Dollar Contract (6A – CME)
In a week where the downtrend in the Aussie extended lower into the 0.71 area, the pick up in open interest was again very significant, increasing from 180k contracts all the way to nearly 200k, making a new year high.
While the overall net change in large specs was barely noticeable, by inspecting further the data, we saw an increase of about 18k longs vs 16k shorts. This development suggests counter-traders are starting to find it more compelling to engage in buy-side opportunities in the Aussie sub 0.7150/0.71.
Interestingly, commercial longs failed to add new exposure in the market even as the rate got hammered to 0.71. What this means is that commercials were comfortably awaiting lower levels to start hedging.
Looking at asset managers and dealers, the only change that strikes us as quite bearish is the increase in asset manager shorts by over 10k contracts.
How to Be Positioned Going Forward?
Overall, the latest futures data was inconclusive in the euro and yen futures contracts, while new directional clues were provided in the sterling and the aussie, although the latter carries a caveat to be aware of. The renewed buying interest in the sterling, which has the back-up of large specs amid rising open interest, heralds a friendlier environment to bid up the currency on pullbacks, even if such assumption runs the risk of being just one brexit headline away from being invalidated. For now, the fact that new long-sided business was added should be interpreted as growing expectations of avoiding a hard brexit, and that’s bullish the sterling. In the aussie front, the data does not negate the view of keep selling strength in the currency, even if the price action seen on Sept 12th suggests that a possible change in market structure may be looming. As long as the China vs US trade war rhetoric doesn’t improve from its current retaliatory stance, the oceanic currency is set to suffer.