Pound's Breakout Exposes Yearly Highs
Speculators piled into the British pound, triggering a range breakout, according to the latest Commitment of Traders (COT) report. Equity markets remain resilient despite cautious positioning trends by (non-commercial) speculators and an increased bout of volatility. Meanwhile, speculators were mixed in terms of positioning vs the USD, but managed to up their extremely bullish bets in gold and oil.
The most recent COT report highlighted that the overall (net long) position in British pound futures is now trending higher again, as it advanced the 3rd straight week to reach 52%. The retail FX population, meanwhile, has continued to scale back their net long position to just 43% (as of Friday's close) from 59%, just a few weeks ago. These forces in sentiment typically translate into gains for the pound, which came to fruition last week after the GBP/USD broke-out of a 7-week rectangle (range consolidation) pattern. This bullish development suggests that while former range resistance in the 1.3340 is maintained to the downside, a re-test of the recent highs in the 1.3600/60 region remains likely in the near-term.
Just like everything else in the global financial markets, it was a choppy week for the Japanese yen, as it pulled back from its recent recovery off yearly lows (vs a trade-weighted basket of currencies). In the latest COT report, the yen continued to back off the largest net short position for the year vs the USD, but due to the paring of long contracts, the net long percentage remained unchanged. This reiterates what was already known, that the crowded yen carry trade has reversed, but due to its extreme short (79%) position, still has ample room to rally further. Meanwhile, retail FX positioning data pointed out that the retail population has started to buy into the yen, pushing the net long (by percent) up to 48% from 45% a week prior. While, the direction in sentiment remains mixed, the USD/JPY has clearly settled back into an 8-month range between Y111 & Y114. The technical picture, however, has stabilized a step further from a week ago, but the immediate outlook remains mixed as well. That said, there's a slight (USD/JPY) bearish bias to the downside while the midpoint of the most recent range (just under Y113) continues to cap price-action to the upside.
The EUR/USD began the week by pulling back from 2-month highs and was that was reflected in the latest COT report (into the Nov 28th close), as speculative euro positioning by non-commercial traders pared back positions from what has recently been one of the largest net long position by (non-commercial) speculators on record. According to recent retail trading data, the retail population continued to be sellers into bouts of euro strength and buyers on pullbacks, which partly explains why price action in the EUR/USD has been choppy as well. Meanwhile, the technical picture has improved for the trade-weighted euro, as recent strength has managed to highlight a higher base within the last 6-month trend up. This continues to hint of further strength for the euro, which puts the EUR/USD in position to the recent highs near 1.21 once 1.1950/60 is fully cleared to the topside.
Bullish sentiment by Australian dollar (futures) speculators dipped again for the 8th straight week, albeit only slightly (935 contracts). This continues to highlight the recent downturn in sentiment from the record net long position seen back in September from 80% to 67% (as of Nov 28th). According to the latest retail FX positioning data, the retail trading population continues to anticipate a turn in the AUD vs the USD. This extreme level in sentiment by short-term momentum traders has reflected a turn in price-action in the AUD/USD the previous two times this year. That said, price-action has only retraced a small portion of recent weakness and will need to at least clear .7625 (on a daily closing basis) to help the AUD/USD attempt to stabilize near-term bearish momentum and shift focus back towards the key .7730 area again.
Canadian dollar futures (bullish) speculation has steadied as of late, but remains extremely high, as positioning remains near the highest level of net longs (by percentage) over the past 5 years. Meanwhile, the USD/CAD ended the week thrusting lower, highlighting a possible double top (just above 1.2900) and a very bearish weekly (chart) indication. This suggests that if the USD/CAD can sustain a move through 1.2630 on a (daily) closing basis, then the USD/CAD should remain well-positioned to extends weakness towards the 1.25 threshold. That said, Friday's (bearish) moves does seem a bit exhaustive and could recover back to 1.28 before aiming for 1.2630, but for now technical momentum has seemingly turned negative for now.
Gold futures (bullish) sentiment edged higher, as the net long percentage of contracts moved up to 82% (as of Nov 28th) from 79% a week prior. Meanwhile, Gold futures since recovering off 1264 (near a key Fibonacci retracement) over a month ago, have thrusted back towards the lower end of the latest consolidative range. This is partly due to the retail population, which according to recent positioning data, has resumed buying and continues to anticipate a turn in the yellow metal. If this trend in sentiment continues and retail traders continue to buy gold, this could highlight a key lower top just under 1300 and shift the overall focus to 1240. That said, if volatility and risk aversion continue to rear their ugly heads, then gold stands to benefit and would likely persuade to break above 1300 towards 1315 initially.
Crude oil futures sentiment remained near extremes, as positioning by futures traders (into Nov 28th) inched up to 83% from 82%. Net-long positions recovered most of what had been lost the prior week, allowing for bullish sentiment (by percentage) to reach the highest of the year. Meanwhile, Crude oil prices have consolidated since reaching a fresh 52-week high. That said, last week's price action was able to maintain support by early November's former closing highs at 57.45, which should re-invigorate a potential move towards the 2015 highs just above the 60 region. The technical reaction there, however, will be critical in determining how much further oil prices can run in the face of extreme (long) positioning by speculators.
E-mini S&P 500 futures continue to mark fresh all-time highs despite sentiment turning more cautiously. In the latest COT report, futures speculators continued to pull back slightly, trimming their gross long total by nearly 20K contracts and adding roughly 30K in gross shorts. The overall uptrend in S&P 500 futures, however, while technically overbought (weekly indicators), should remain in tact while maintaining support in the key 2591 region (on a daily closing basis). If volatility were to continue to pick-up, then the 2542/53 area would be quickly exposed to the downside. It should be noted, however, that topping processes typically take time at this stage and so far there's only minor evidence to suggest that equities overall have begun to temporarily top out. That said, increased volatility seen last week, suggests an end of this long streak of one way (up) price action, and likely sets the stage for a range to be traced out for the final weeks of 2017.
Nasdaq 100 futures speculators continue to pare-back their overall bullish stance down to 52%. In the latest COT report, speculative sentiment continued to diverge with price action, falling once again to the lowest level (net long) for the year. Last week's bout of volatility should be a cause for some concern, especially since price-action managed to trace-out a lower top. That said, the bounce back on Friday does highlight the possible completion of an ABC (3-wave) correction, which could hint at a re-test of the recent highs. At this point, however, if there's a quick resumption of weakness, a sustained move below 6225/35 (Nasdaq 100 futures) would shift overall bull momentum lower and could quickly re-open the 6125 region to the downside.
US 10-Year futures bullish sentiment remained relatively upbeat, as non-commercial traders trimmed both gross long and short positions, but added nearly 13K contracts to the net (long) total. The recent bump-up in long positioning suggests that futures speculators remain somewhat skeptical towards the run-up in yields. While most of the attention has been focused on the front end of the curve, it seems that the flattening trend is here to stay while 10-year futures maintain support in the 124.20 region. That said, absent of the spike of volatility on Friday, 10-year futures had been trending lower despite the recent non-participation of speculators, which suggests that if economic news next week is generally positive, bond prices should navigate lower and yields higher.
US 30-year futures speculators continued to add to their slightly bullish stance, according to the latest COT report. Meanwhile, the latest move in 30-year yields now highlights another lower top near 2.85%. And, although, much of the focus has been on the narrowing of the yield curve, if US 30-year yield were to materially close below 2.74%, not only would it shift US 30-year futures back towards the highs seen back in September & June, but it would most likely further flatten the yield curve, which could usher-in additional bout of risk aversion that would likely further influence the entire global financial market.
Disclosure: None.