Yen traders flipped to net-long exposure: COT report

Market positioning from the COT report - as of Tuesday August 13, 2024:

• Large speculators flipped to net-long yen exposure for the first time since February 2021 (and asset managers were on the cusp of joining them)
• Net-long exposure to GBP/USD is -67% lower from its record high set four weeks ago, and fell for third week among large speculators
• Large speculators reverted to net-short VIX exposure after just one week of being net long
• Asset managers were close to flipping to net-short exposure to US dollar index futures
• Net-long exposure to gold futures rose a combined 55.6k contracts between large speculators and asset managers

US dollar positioning (IMM data) – COT report:

The divergence between traders and their US dollar positioning continues. Net-long exposure to the US dollar index fell to a 32-week low among asset managers. Gross shorts increased to a 53-week high and gross-long remained near their lowest levels of the year, and they are close to flipping to net-short exposure.

Yet large speculators increased their net-long exposure to a 4-week high, which is near their most bullish level since December. Moreover, gross longs rose to an 81-week high of 33.7k contracts, and shorts remained flat around 15.1k contracts.

Asset managers have generally done a better job of being on the correct side of the US dollar trade in recent years, so it is hard to take the lead from large speculators on this one. Besides, large speculators could simply be using the futures market as a hedge. Regardless, I am not overly bullish on the US dollar – even if a bounce could be justified over the near term.

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

Large speculators flipped to net-long yen exposure for the first time since February 2021. And asset managers were not far from joining them, who are net short just -3k contracts. There has been a surge in long bets from large speculators, with 87k long contracts under their belt. And this has been combined with large specs slashing their short exposure by -70% over the past five weeks.

While asset managers are on the cusp of flipping to net-long exposure, they have not been as quick to add to long exposure as large specs.

We could be at a bit of a crossroads for then yen. The BOJ are not as hawkish as they were, and that could keep a cap on future long bets. But neither are the BOJ as dovish as they were, which could limit the level of new short bets. Of course, if traders continue to expect multiple Fed cuts then that benefits the yen bullish outlook (as it is traded against the US dollar). But perhaps we have already seen the better part of the move.

Also keep in mind that Jerome Powell speaks at the Jackson Hole Symposium on Friday, but I see little room for any dovish surprise given the dovish market pricing already in place. And that could cap USD/JPY downside over the near term.

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

Asset managers may be on to something, given they decreased their net-short exposure to CAD and NZD futures over the past two weeks (and AUD futures last week). This has mostly been a function of short covering, as the pickup in gross-long exposure has been small. But given commodity FX has been dragged lower, it suggests we may still be at the earlier stages of a bounce.

Wall Street indices look like they want to resume their trend and reach new record highs. So unless something unexpected arrives to derail hopes of a soft landing in the US, we could find that traders bid dips in risk markets such as AUD/USD and NZD/USD and fade rallies on USD/CAD.

Gold, silver, copper futures positioning – COT report:

I have noted in recent reports that net-long exposure to gold remains defiantly bullish despite a pullback in metals in general. And that has paid dividends for those that held on to their gold holdings, as prices reached a record high on Friday. The combination of geopolitical uncertainties and Fed rate-cut bets saw gold futures close above $2500 for the first time on record. Large speculators and managed funds increased their net-long exposure by over 55k contracts before prices hit a new high.

Managed funds remain net-long copper futures, but only just at 7.4k contracts. Which is just under halve the amount of large speculators. Reports of Chinese buyers propping up the market could account for the cushion it has received. But with gold hitting a record high, it is possible we have seen swing lows on copper and silver prices for now, and that could tempt bargain hunters.

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

Wall Street indices were able to recoup some of their recent losses last week, on renewed optimism of a soft landing and Fed rate cuts. This saw the Dow Jones, S&P 500 and Nasdaq 100 futures all form 3-day bullish reversal patterns called morning star formations. It now looks like they want to retest and likely break to new record highs. Which also means we can likely ignore the fact that asset managers flipped to net-short exposure to Dow Jones futures by last Tuesday.

On a sidenote, it also serves as a reminder that the S&P 500 is the preferred long during good times, given how reluctant asset managers were to reduce their net-long exposure during bad times.