Yen traders are likely already net long, VIX shorts plunge: COT report

Market positioning from the COT report - as of Tuesday, 30^th July 2024:

• Futures traders increased their net-long exposure to the US dollar across all currencies by US $6.3 billion last week, although the US dollar index fell -1% on Friday
• Net-long exposure to GBP/USD futures fell from a record high by -27% (-30.1k contracts from 111.4k contracts)
• Traders flipped to net-short exposure to commodities for the first time in 8 years (using a basket of 20 futures contracts)
• Net-long exposure to CAD futures rose to a record high among large speculators and asset managers and large speculators
• Large specs flipped to net-short exposure to NZD/USD futures and increased net-short exposure to AUD/USD futures for a second week
• Asset managers reduced net-long exposure to S&P 500, Nasdaq 100 and Dow Jones futures (yet remain defiantly long to the S&P and Nasdaq)

US dollar positioning (IMM data) – COT report:

Traders increased their net-long exposure to the US dollar futures (in aggregate) by $6.3 billion dollars last week. Yet the weak Nonfarm payrolls report saw the US dollar plunge 1% on Friday on recession bets. If we truly are heading towards (or already in) a recession, there should come a point where the US dollar becomes a safe haven irrespective of how many cuts the Fed could be facing. And as traders remain net-long USD futures in aggregate, we may find that comes sooner than later.

However, specifically looking at positioning on US dollar index futures shows that while asset managers remain net long, they have reduced their net bullish exposure by around 50% in the past four weeks. This is a metric to keep an eye on, but there could be some support for the US dollar index even if momentum for prices points lower for now.  

JPY/USD (Japanese yen futures) positioning – COT report:

An established downtrend has been in place on yen futures for over 12 years. Yet the near 12% surge over the past three weeks has some speculating that we may have seen a significant low on the yen (or high on USD/JPY). What is most impressive above the yen rally is that large speculators had pushed their net-short exposure to a 17-year high, and very close to reaching a record high. Asset managers were already at a record high. Yet by last Tuesday, they have reduced their net-short exposure by around 60%.  

Short covering has been the main cause, but we have also seen a gradual rise in long bets in recent weeks. And if we consider that the yen rose a further 6% between Wednesday and Friday (which the COT data does no capture) then we could find that large speculators and asset managers are very close to net-long exposure. Assuming they’re not already.

The BOJ are the most hawkish they have been in years, and investors are wading back into the bond market on bets that the Fed may be forced to cut by 50bp increments. Wall Street has been battered on bets the US may already be in a recession, and that has further benefitted the yen.

Commodity FX (AUD, CAD, NZD) – COT report:

As noted above, traders flipped to net-short commodity FX futures for the first time in eight years (using a basket of 20commodities from the CME exchange). It is therefore not surprising to bears show a keen interest in commodity FX pairs AUD, CAD and NZD.

Large specs and asset managers pushed their net-short exposure to CAD futures to another record high, increased their net-short exposure to AUD/USD for a second week, and large specs flipped to net-short exposure. And should appetite for risk remain dented, it leaves plenty of scope for bears to return in force on AUD/USD and NZD/USD.

Metals futures (gold, silver, copper) – COT report:

Not even the safety of gold escaped the bearish sweep of the commodity space last week, with net-long exposure to key metals markets falling in tandem. Large specs have reduced net-long exposure by around -33k contracts over the past two weeks, and are just 24.5k net long. Managed funds are on the cusp of flipping to net-short exposure (and they may already be following Friday’s weak NFP report).

Longs and shorts were reduced for silver futures as traders ran for cover. But it is interest to note that short interest did not pick up meaningfully last week for gold, silver for copper futures. So for now at least, we’re seemingly witnessing a flush of weaker bulls as opposed to an onslaught of bears hitting the metals market.

S&P 500, Dow Jones, Nasdaq 100 futures positioning – COT report:

The Nasdaq 100 officially entered a correction last week, having fallen just over the -10% threshold from its high. The S&P 500 and Dow Jones are yet to join the ‘correction club’ with their respective -5.6% and -4.6% retracements, but with Wall Street lower and the VIX surging things are clearly not quite right for bulls.

Net-long exposure was lower for all three futures indices last week, but not by an alarming rate. In fact, asset managers remain defiantly net-long the Nasdaq 100 and S&P 500 with all things considered. Therefore, at this stage I’m leaning towards the current retracements being just that, and not a major top.

Volatility Index (VIX) futures - COT report:

Asset managers may appear comfortable with Wall Street indices, but they have shed a considerable level of shorts overt the past four week, resulting in net-short exposure plunging by 70% over this time. It strongly suggests real money traders were already wary of the Wall Street selloff and stronger case for Fed cuts. This also coincides with a surge into bonds on bets the Fed would be forced to cut more than they were letting on.