Futures traders flipped to net-short USD exposure: COT report

• Futures traders were net-short USD futures by -$9 billion, marking their first bearish exposure since February
• Large speculators reduced their gross-short exposure to the Canadian dollar by -30% (-54.6k contracts)
• They also increased gross-long exposure to the Swiss franc by 30% (2.3k contracts)
• Net-long exposure to EUR/USD futures increased by 37k contracts, with longs rising 12.4% (24k contracts) and shows falling -9% (-12.8k contracts)
• Large speculators remained net-long USD/JPY for a third week (and asset managers a second week) although largely unchanged from the week prior
• Net-long exposure to GBP/USD futures rose 22.4k contracts
• While net-long exposure to gold was higher by 3.2k contracts among large specs, they actually reduced exposure overall, trimmings shorts by -24% (-15.4k contracts) and longs by -3.4% (-12.2k contracts) which inadvertently sent net-long exposure higher by 3.2k contracts

US dollar positioning (IMM data) – COT report:

If we look at USD futures exposure in aggregate, traders flipped to net-short exposure for the first time since February. This is also the case for the USD against G10 currencies. Yet a divergence remains in place in the US dollar index, with asset managers net-long (just) by a mere 2k contracts, and large speculators nudging their net-long exposure to a new year-to-date high of 18.9k contracts.

But as we have seen two strong bearish months of USD selling, I suspect some mean reversion could be due for the US dollar index. And that seems to have already begun. Also note that the US dollar index held above 1000 and formed a small bullish inside week last week, so perhaps asset managers will remain net-long a little while longer.

But it should be noted that short bets against the US dollar index have been rising, and positioning on EUR/USD futures have been relatively bullish. And that could potentially cap gains on the USD index and keep its retracement higher on the smaller side.

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

In recent weeks we have seen gross longs rise and gross shorts fall on EUR/USD futures, among both large speculators and asset managers. This is what we’d expect to see alongside a healthy rise in prices. The only thing that spoils that picture somewhat is the 2-week bearish reversal (dark cloud cover) on EUR/USD. Should US data surprise to the upside this week, it leaves the potential for a deeper pullback.

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

Commodity currencies enjoyed a solid August against the US dollar, with AUD/USD and NZD/USD forming bullish engulfing months and USD/CAD forming a bearish engulfing month. Anticipation of the Fed’s dovish policy took precedence over all else to boost appetite for risk, even though the BOC are fully expected to cut their cash rate by 25bp for a third meeting in a row this week.

Most notably, large speculators reduced their gross-short exposure to CAD futures by 30% (-54.6k contracts), although they still remain net short by -110k contracts. With longs remaining around 19k, any strength on CAD can be attributed to short-covering and not by bullish bets.

However, long bets picked up for NZD/USD futures for a second week, and shorts have a been trimmed 3 of the past 4 weeks. Now just -8.4k contracts net-short, we might even see traders flip to net-long exposure given the unexpected surge in business sentiment for New Zealand, after the latest COT data was collected.

Net-short exposure to AUD/USD fell for a second consecutive week among large speculators and fourth week among asset managers. Both sets of traders increased longs and trimmed shorts. However, as AUD/USD snapped a 3-week winning streak below resistance, I suspect some mean reversion lower could be due before it heads for 69c.

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

Despite an increase in net-long exposure for gold, silver and copper futures up to Tuesday, the three metals would go to close the week lower by Friday. Mean reversion for the US dollar in in place, and month-end-flows likely favoured a higher US dollar given the two bearish months which nearly drove the USD index down to 100.

With the US dollar showing the potential to extend its retracement higher, metals could also face further selling pressure this week. Especially if incoming data form the US exceeds expectations, with traders seeking confirmation of their very dovish market pricing of the Fed.

Wall Street indices (S&P 500, Dow Jones, Nasdaq 100) positioning – COT report:

It is a case of ‘more of the same’ regarding asset managers’ exposure to Wall Street indices. They remain a little cautious on the Nasdaq 100, which net-long exposure remaining way off its peak set in Q1. The Dow Jones reached a record high last week and asset managers seem happier to back it than the Nasdaq, increasing net-long exposure for a second week following 1-week net short. Net-long exposure also remains firmly bullish for the S&P 500 futures market, and just below its YTD peak.

It becomes difficult to construct an overly bearish case for Wall Street indices while investors remain confident on a soft landing and multiple Fed cuts.