Bullish bets on the yen continue to gain traction: COT report

Market positioning from the COT report – Tuesday, 26 November 2024:

• Large speculators decreased their net-short exposure to JPY futures for the first week in eight, by 18k contracts (15.9k longs were added, -3.1k shorts were closed)
• They increased long exposure to EUR/USD futures by 17.6% (29,422 contracts) and reduced shorts by -3.6% (-5.7k contracts)
• Net-short exposure to CHF futures rose to a 17-week high among large speculators
• While large speculators pushed net-long exposure to AUD/USD futures to a near 7-year high, asset managers increased their net-short exposure by 5.9k contracts
• Large speculators were their most bearish on NZD futures in 12 months heading into the RBNZ meeting, with a net-short exposure of -18.5k contracts
• Net-short exposure against CAD futures decreased for the first week in seven, although by a mere –434 contracts
• Short exposure to WTI crude oil futures declined by -7.8% (-1.7k contracts)
• They also reduced short exposure to gold by -6% (-4.8k contracts) and silver futures by -7.9% (-1.7k contracts)

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

It seems that large speculators were right to pile into long bets last week, given the revived hopes of a 25bp hike from the BOJ this month. The yen was the strongest major currency last week, as it finally saw a decent upswing in line with my bias outlined several weeks ago. And it aw large specs trim shorts and increase long exposure by 23.3% (14.9k contracts) last week.

Asset managers also trimmed net-short exposure by -2.9k contracts, by closing -1.8k short contracts and adding 1k long contracts.

Ultimately, I suspect an important swing low has been seen on the yen which could prompt a deeper pullback on USD/JPY over the coming weeks.

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

With a net-short exposure of -42.6k contracts, large speculators are on the cusp of being their most bearish on the currency since the pandemic. They added 196.8k short contracts last week and also trimmed longs by -5.7k contracts. Asset managers also added 160.3k short contracts and reduced longs by -13.7k contracts.

While asset managers remain net-long EUR/USD futures, they have reduced their net-bullish positioning by more than half since the May 2023 peak. Moreover, net-speculative volume is at its least bullish position since September 2022.

With the ECB more likely to be cutting rates than not, once pitted against the mighty US economy, a dip below parity could be on the cards alongside increased levels of net-short exposure among large speculators as we head into 2025.

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

I suggested a couple of weeks ago that commodity currencies such as AUD/USD, NZD/USD and USD/CAD could be approaching an inflection point given their extended 1-way moves (to the detriment of commodity FX). Recent price action is playing nicely with this theme, with NZD futures printing a bullish outside week following the less-dovish-than-expected RBNZ meeting, while CAD and AUD printed bullish hammers.

However, I am not convinced we will see particularly strong rallies on these currencies unless we see a major pickup for sentiment. And that is difficult to see with Trump’s trade threats lurking in the shadows as we head towards the new year.

The USD is traditionally weaker in December to allow such pairs to rally, but we should also be prepared for uncertainty to take the sting out of such bullish moves this year unless a fresh risk-on catalyst surfaces.

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

Net-long exposure to metals remains within a ‘cooling off’ period after being aggressively bullish earlier this year. While gold prices have tried to recover, large speculators and asset managers remain hesitant to chase the move higher. For this reason, I continue to suspect that the current recovery will fail to simply reach a fresh record high, and instead print a new cycle low as part of a deeper retracement. And if gold continues to falter, to too will silver.

Copper prices have also failed to regain bullish traction despite stimulus from Beijing. And that is also being reflected in a lacklustre level of net-long exposure to the metal.