Commitment Of Traders Report And Technical Outlook

The latest Commitment of Traders report covers the week ending May 29. Generally speaking non-commercial participants in the futures market were dollar buyers, either by adding to net short foreign currency positions, such as the euro and Australian dollar, or by reducing net long positions, as was the case in sterling and the Canadian dollar. However, in the yen, Swiss franc and Mexican peso, the net short positions were reduced.
 
Unlike most analyses of this weekly report, we find that drilling down into the gross speculative (non-commercial) positions sheds light on important shifts which just focusing on the net position misses. Moreover, we think there is an important distinction between new buyers coming into the market and old shorts covering, yet the conventional interesting in the net position obscures.
 
Euro: The net short speculative position stands at a new record of 203.4k contracts in the week ending May 29. The prior record from the previous week was 195.4k contracts. Shorts rose by 13.6k contracts. Interestingly, the long positions also grew as bottom pickers came in and at 40.3k contracts, it is the largest gross long position in a month.
 
The fundamental political and economic backdrop of the euro is poor. As we  suggested target of CAD1.0420  and the next level of resistance is seen in the CAD1.0500-25 area. The Bank of Canada meets on June 5. It is not expected to do anything and the market has been pricing in rate hike by the end of the year. We do not think this is likely, and given the pullback of commodity prices, especially energy, and the recent string of poor US data, the risk is of a more dovish or less hawkish slant. Initial support for the US dollar is seen in the CAD1.0280-CAD1.0300 band.
 
Australian dollar:  The net short speculative position more than doubled to 35.5k contracts. This is the largest net short position since at least 1993. To appreciate what a reversal this represents, note that at the start of May the speculative position was net long a record amount. The decline in the net short position in the most recent week was more a function of longs capitulating (-15.2k contracts), more than short jumping aboard (+3.4k contracts).
 
The Reserve Bank of Australia also meets on June 5. While a 25 bp cut is widely expected, it is more likely to deliver another 50 bp cut than stand pat. The Australian dollar staged a recovery after the poor US jobs data. Additional upticks are likely to be capped in the $0.9750-75 range. A move above there could signal gains toward $0.9900. Meaningful support is difficult to find, though initial support may be around $0.9580-$0.9600.
 
Mexican Peso:  The net short speculative peso position was shaved to 13k contracts from 16.1k. This small move was mostly the establishment of new longs (+2.5k) while shorts were pared by about 600 contracts. 
 
Since early May, the US dollar has appreciated a whopping 13.6% against the peso. The softening of the US economy, including slower May auto sales figures, does Mexico no favors. The dollar reversed against the peso after the jobs data, peaking near MXN14.60. It finished near MXN14.31 on June 1, a little below the previous day close. The next level of support is seen around MXN14.07-MXN14.11. 

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Written By: Marc Chandler