Weekly CoT Update: New Zealand Dollar, Euro, and Other Major Contracts

COT HIGHLIGHTS:

• NZD speculators made a strong shift into long territory
• Euro specs covered for second week in a row, but remain firmly bearish
• Large speculator profiles for other major currencies/markets

Last week’s CoT report brought with it an unusual showing by speculators in the New Zealand Dollar as they covered their short aggressively and turned net-long. Euro speculators covered for a second week in a row amidst choppy trading conditions, but this group of trend-followers remain firmly in the bear camp. Crude oiltraders made a very small change to their positioning, however; that was before the major damage was done for the week. We will have to revisit oil trading activity next week.

On Fridays the CFTC releases a detailed report of traders’ positioning in the futures market as reported for the week ending on Tuesday. Outlined in the table below are key stats concerning the positioning of large speculators (i.e. hedge funds, CTAs, etc.), excluding small speculators and commercial traders.

‘Large specs’ are known to typically employ trend-following strategies, and as such, they tend to add to long positions and reduce shorts in uptrends while reducing long positions and increasing shorts in downtrends. When analyzing the data, we take into consideration the direction of their position, magnitude of changes, as well as extremes.

Key stats: Net position, one-week change, and where the current position stands relative to the past 52 weeks.

NZD SPECULATORS MADE A STRONG SHIFT INTO LONG TERRITORY

Large speculators turned net-long for the first time since June, with a net purchase of over 18k contracts. It was still a curiously strong move. It was the largest change of hands since selling over 22k contracts back in June when large specs turned net short.

It also comes after a relatively strong up-move and recent reversal. It could turn out to be a poorly timed maneuver, especially if Kiwi starts going the way of its sibling currency, Aussie, in turning lower.

NEW ZEALAND DOLLAR POSITIONING CHART

EURO SPECS COVERED FOR SECOND WEEK IN A ROW, BUT REMAIN FIRMLY BEARISH

Large speculators in aggregate bought 3k contracts last week, the second week in a row we saw their short position shrink amidst a choppy trading environment. Large specs have been short since September and remain firmly in the bear camp.

Price action has generally become coiled up throughout the year, which could make for an explosive price move soon. If the generally weak trend since the high of the year continues, look for the -53k contract position to expand as we head into 2019. Conversely, if a strong move develops against the trend it could spark a strong reversal as traders are caught leaning the wrong way. A resolution one way or the other looks to be just around the bend…

EURO POSITIONING CHART

OTHER MARKETS:

U.S. DOLLAR INDEX

BRITISH POUND

JAPANESE YEN

SWISS FRANC

CANADIAN DOLLAR

AUSTRALIAN DOLLAR

GOLD

SILVER

COPPER

S&P 500 (E-MINI)

EUR/USD Sensitive to Holiday Illiquidity, Eyes Fed and ECB

TALKING POINTS – EUR/USD, FED, ECB, ITALIAN BUDGET, BREXIT, TRADE WARS

• EUR/USD rallies on Italian budget détente but prices may turn lower
• Diverging monetary policy between Fed and ECB could point to losses
• Long-term market themes and upcoming inflation data in focus

The Euro has recently gained against the greenback, paring losses sustained for most of this year. However, whether EUR/USD extends its upside momentum or succumbs to long-term interest rate differentials is yet to be seen. 

DAVID SONG, CURRENCY ANALYST

EUR/USD’s failed attempt to test the November-high of 1.1500 and recent hawkish forward guidance from the Federal Reserve could indicate near-term bearish momentum, according to Currency Analyst David Song. Lingering interest rate differentials fuelled by the European Central Bank’s commitment to its zero interest rate policy, combined with long-term bearish formations in the Relative Strength Index, could also point towards losses for the currency pair. Near-term support for the Euro comes in near 1.1220 (78.6% retracement), while 1.1510 (38.2% expansion) could keep the unit capped into 2019.

EUR/USD Chart (Daily)

JAMES STANLEY, CURRENCY STRATEGIST

On the other hand, the currency pair could be poised for a rally on key fundamental themes, according to Currency Strategist James Stanley. A breakthrough in the Italian budget saga and the ECB’s recent announcement that bond buying in its quantitative easing program would end could spur a rally for EUR/USD. Euro bulls should look for a break above the 1.1500 level following fresh December highs, with further evidence of higher-low support.

EUR/USD Chart (8-hour)

Looking ahead, low liquidity due to the holiday season and partial US government shutdown means that EUR/USD could be susceptible to volatile fundamental themes. Traders should keep a close eye on developments on long-term market issues, especially ongoing US-China trade talks, equities’ rout, and Brexit negotiations with the EU. In addition, the currency pair also faces the release of December’s US consumer confidence data and preliminary German inflation figures.