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Written by David Rodriguez, Currency Analyst

 

Explanation of Charts:

Net Non-Commercial (speculative) Positioning (top red): consists of trend followers, extremely net long at market tops and extremely net short at market bottoms

Net Commercial Positioning (top blue): consists of hedgers, extremely net short at market tops and extremely net long at market bottoms

Difference between Net Non-Commercial and Net Commercial (green):  referred to as COTDiff, net commercial subtracted from net non-commercial, extremely net long at tops and extremely net short at bottoms

Open Interest (black): total number of contracts currently open, the most number of contracts are often open at significant market tops and bottoms

COT Index (bottom blue): The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over the last 52 weeks.  A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming.  The readings are for the actual currency, not the currency pair.  For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).

Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes.  The last 4 weeks of the COT Index are shown because it is just as important to know where the index is coming from.  For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.    



EUR: Euro speculative longs inexplicably fell through the 7 days ending September 25, with Net Non-Commercial positions actually declining to 83,448. Though buying interest remains elevated, net longs are still a healthy margin below the extremes seen through 2006 and 2007. As such, the EURUSD has scope for continued gains, though it is clear that the pace or extent of gains will slow as net long positioning grows.




GBP: British Pound net long positions predictably improved through Sep 25, as the sterling rallied over three big figures from the previous week’s close.  Such net longs will only improve further through subsequent COT data, as the GBPUSD made especially large gains on the 27th and 28th. Yet even with a jump in net longs, GBP positioning remains in relatively oversold levels as it relates to the past two years of data. This leaves scope for continued Sterling rallies, with sentiment capable of driving Cable through recent heights.




CHF: Speculative positioning has reached extreme overbought levels on the Swiss Franc (oversold on the USDCHF), suggesting that a turn may occur in the coming weeks of trade. Though we are reminded that positioning can remain extreme for extended periods of time, it remains relatively clear that the CHF has less scope for a continued medium term rally. Similarly overextended Commercial Net Longs support this view, with the COT Difference coefficient (line in green) at its highest since mid-2006. At this point the USDCHF based near 1.1900 on its way to 1.2800. 




JPY:  The JPY remains in overbought levels similar to the CHF, with the COT Difference coefficient at its highest since the USDJPY’s mid-2006 bottom. This likewise leaves scope for a medium-term JPY reversal, with a break higher in the USDJPY to likely lead to trend continuation. We are reminded that currencies can remain overbought for weeks at a time, but sentiment supports a sustained turn in the Japanese Yen. 




CAD:  Canadian dollar net speculative longs inexplicably fell in the 7 days ending September 25, but it remains relatively clear that recent trends remain towards CAD buying (USDCAD selling). In this regard, positioning actually grew less extreme through recent data. The currency’s subsequent run to multi-decade heights tells us that Net Longs likely grew in subsequent trade, but we are not ready to call a CAD reversal in the absence of further confirmation. It remains relatively clear that sentiment is growing increasingly overstretched, but further USDCAD lows may occur before a worthwhile turn.




AUD:  Speculative positioning was marginally improved for the Australian dollar, but the currency actually remains in relatively oversold territory as compared to previous heights. This leaves further AUD rallies firmly in play, with a continuation in trend favoring appreciation. A break above recent multi-decade heights leaves the currency pair overbought from a technical perspective, but healthy sentiment nonetheless signals further trending.