Futures traders reduce yen speculation after BOJ intervention: COT report

Market positioning from the COT report - as of Tuesday May 7, 2024:

• Net-short exposure to USD/JPY futures fell at the fastest weekly pace since March 2020 among large speculators
• Large speculators flipped to net-long exposure EUR/USD futures
• Yet large speculators also flipped to net-long exposure for US dollar index futures
• Asset managers seem less concerned with US indices after flipping to net-short exposure to VIX futures
• They also increased net-long exposure to S&P 500, Nasdaq and Dow Jones futures
• Net-short exposure to AUD/USD futures fell to a 14-week low among large speculators

US dollar positioning (IMM data) – COT report:

Positioning on the US dollar continues to show mixed signals. Net-long exposure to all US dollar futures and G10 FX were lower for a second week, asset managers also trimmed longs. Yet large speculators actually flipped to net-long exposure.

Traders like binary outcomes as it can provide clarity for expectations and cleaner trends. Yet the disparity of trader positioning may be attributed to the fact that traders are grappling with higher-for-longer rates alongside hopes of cuts.

Perhaps we would be best off paying more attention to USD positioning in its entirety, which reached its highest level of net-long exposure in nearly five years, just two weeks ago. And that warns of a sentiment extreme.

Overall, I believe the US dollar has topped for now and that inflation will eventually behave. It's just traders want too much too soon, and react to every scrap of info with a clear bias towards weak data in hopes of their beloved rate cuts.

EUR/USD (Euro dollar futures) positioning – COT report:

Adding further confusion to the US dollar debate is positioning on EUR/USD. Large speculators flipped to net-long exposure, after just two weeks being net short. Perhaps there is some nervousness over whether the ECB will have the wriggle room to cut twice this year. And if traders get behind the euro, it suggests downside potential for the US dollar index may be limited, given the euro accounts for around 57% of the dollar index basket.

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

A clear pattern has emerged on Japanese yen futures; exposure to it is being trimmed by bulls and bears. Asset managers and large speculators were much quicker to close short bets last week than the week prior, with a notable drop in long bets seen last week as well. And this makes sense from the angle that the BOJ have been confirmed to have intervened twice, which makes the yen a hot potato for some.

But what really stands out from last week’s COT data is that large speculators trimmed their gross-short exposure at the fastest weekly pace since March 2020. Whilst asset managers only trimmed at their fastest pace since July 2023, longs were also culled at a similar rate to show less of an appetite to speculator on the currency in either direction. And this coincides with a drop of open interest for all futures contracts.

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

Asset managers refrained from switching to net-short exposure to Dow Jones futures last week, instead increasing their bullish exposure for the first week in five. Large specs and asset managers trimmed shorts and increased longs to the Dow Jones, although the picture was quite mixed for the S&P 500 and Nasdaq 100 among both sets of traders.

Ultimately, asset managers have retained their optimism for US indices and this can be reflected in prices, having risen for a third consecutive week. The question now is whether bullish momentum can be sustained and for the indices to break to yet another record high. Out of three indices, asset managers clearly favour the S&P 500 with the Nasdaq 100 in second place. Whilst still net-long Dow Jones, it may be the better bet to short should sentiment take a turn for the worse, given its underwhelming level of net-long exposure.

VIX futures positioning – COT report:

I noted a potential level of nervousness to the stock market in the prior report, with asset managers flipping to net-long exposure. I needn’t have bothered, as just one week later they have reverted to net-short exposure. But what has really grabbed my attention is that it was the fastest weekly increase of snort exposure since March 2020. So perhaps this does suggest the stock market indices may not be ready to roll over quite yet.

WTI crude oil (CL) positioning – COT report:

Futures traders continued to increase their net-short exposure to WTI crude oil futures, even though oil prices went on to close flat for the week. Shorts rose and longs were trimmed among large speculators and asset managers, suggests weaker prices are expected going forward.

Yet WTI crude oil quickly sold off on Friday after testing $80, suggesting strong resistance over the near term. But as we saw prices retrace over 12% from the April high by last week’s low, my bias remains for at least a temporary bounce above $80 in due course. Particularly id the US dollar weakens further.