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Commodity Currencies Continue To Struggle Despite Extreme Optimism By Speculators

by: Peter Ruud

Another record high in speculative euro sentiment.

AUD and CAD underperform.

Yen carry trade increases for the second straight week.

The Canadian & Australian dollar continue to under-perform despite elevated levels of bullish sentiment by futures speculators. The US dollar, meanwhile, managed to climb higher for the 4th straight week despite speculator's pessimism towards the greenback. The latest Commitment of Traders (COT) report also highlighted the 2nd straight weekly increase in the yen carry trade, another record net long euro position, and the continued short-squeeze within the British pound. Lastly, US equities break-out to fresh record highs to begin the 4th quarter, highlighting the continued divergence between sentiment and price-action.

The (Japanese) yen carry trade has re-emerged, according to the latest COT report, as non-commercial speculators increased their bearish bets (gross and net short contracts) vs the Japanese currency for the 2nd straight week. The percentage of net longs, however, ticked up due to the substantial increase in gross long contracts. The Japanese yen against a trade-weighted basket of currencies was mostly unchanged for the week, but remained close to its year-to-date low. According to recent retail FX positioning data, the retail population has become more bullish (in terms of net percentage of contracts) and has upped their (yen) long positions to just over 50%. This may partly explain why the USD/JPY has struggled to sustain a push through the 113.00 level (USD/JPY). The previous two times (in May & July), retail FX'ers reached 53% & 54%, the USD/JPY topped-out in the 114.389 zone, so retail involvement at 51%, may be near exhaustion. That said, only a sustained loss of the 111.00/47 region (USD/JPY) would divert momentum away from key resistance at 114.38, and re-open the 109.54/110.36 area to the downside.

Speculative euro positioning by non-commercial traders improved modestly, according to the latest CFTC data. This marks another fresh all-time high (in terms bullish sentiment), highlighting the largest net long position by (non-commercial) speculators on record. The EUR/USD, however, continues to depreciate, but managed to stabilize late last week after reaching a fresh 3-month low. This may be partly driven by the retail FX population, which according to recent retail positioning data, has begun buying selling euros again. Also, with interest rate differentials (vs the USD) continuing to decrease and weekly (chart) momentum clearly lower (for the EUR/USD), if key support at 1.1677 is cleanly broken, the next (downside) objective isn't until the 1.1421/77 region. That said, daily (chart) bullish divergence emerged late last week to hint of some short-term stabilization in the euro. Only back above 1.1827, however, confirms a shift in momentum back to the upside.

British pound speculative (bullish) sentiment has continued to ascend ever since the BOE (Bank of England) stunned market participants by signaling a rate hike at the next MPC meeting. According to most recent COT report, large (non-commercial) speculators substantially increased their long exposure once again, bumping up the net long position to 57% from 52%. This, however, is occurring while the retail FX population continues to buy the Pound. Moreover, last week's price-action continues to highlight bearish daily & weekly (chart) momentum status and could hint of a retest of the 1.28 region (GBP/USD) if the 1.30 zone is cleanly taken-out (to the downside). That said, it appears that Sterling is a bit oversold (according to daily chart indicators), and the retail population is nearing extremes seen back in July & August.

Bullish sentiment by Australian dollar (large) speculators dipped slightly, but remains near the recent record net long position. The latest divergence with sentiment & price-action seems to be finally catching up to the Aussie, as it has fallen over 3.5% off the recent highs (AUD/USD). According to the latest retail FX positioning data, the retail population continues to buy into the AUD quite substantially. With weekly (chart) momentum indicators pointed downward, this could suggest bullish sentiment by non-commercial speculators may have begun to top out. This would suggest that sustained weakness through the .7727 region would expose .7569/.7626 to the downside, while only back above .7879 would help the AUD/USD attempt to stabilize bear momentum.

Canadian dollar bullish sentiment by large speculators increased modestly in the latest COT report, but more importantly, has reached the highest level of net longs (by percentage) in nearly 5 years. Meanwhile, after reaching a fresh 2-year low a month ago, the USD/CAD has managed to recover quite nicely. The divergence between (non-commercial) speculative sentiment and price-action continues to grow, as the loonie fell over a percent in the last week. The extremely high (81%) net long position by futures speculators coupled with downward (weekly chart indicators) technical momentum, together suggests that the loonie could unwind a bit more in the very short-term. That said, while price-action remains substantially below the 1.27 threshold, the USD/CAD's recovery still looks to be a mere (upward) correction within the latest 5-month downtrend. Meanwhile, the dramatic drop-off in commercial trader's open interest due to the quarterly roll, still remains unclear whether it will have any (bearish) impact on Canadian dollar futures going forward.

Gold futures (bullish) sentiment has continued to wane as of late, but remains at a relatively high level, as the net long contracts total ticked down for the 4th straight week. More importantly, Gold futures since breaking a key trendline in August, have decline over 6% off the recent highs and have managed to erase over half of the latest up-move from July. This may be partly due to the retail population, which according to recent positioning data, has continued to buy in anticipation of a return to strength for the yellow metal. While, there is some room to go before retail traders reach the extremes seen in April & July, daily (chart) momentum indicators are starting to stabilize, highlighting potential key Fibonacci retracement (61.8%) support at 1264. That said, for gold futures to confirm technical (short-term) stabilization, price-action will have to sustain gains above 1283, near the exact midpoint of the latest range (since July).

Crude oil futures sentiment dipped slightly, as positioning by futures traders (into October 3rd) decreased in terms of gross and net long positions. Meanwhile, Crude oil prices suffered the worst week decline in nearly 3 months and have now erased roughly half of the gains seen since late August. While, the technical outlook has deteriorated, Friday's near outside (down) day may mark a near-term (selling) exhaustion, which could highlight support at 49.23, the exact (near-term) range midpoint (50% of 45.59-52.87). That said, if price-action does not immediately recover back (up) through the 49.81/50.09 region in due course, then attention could shift (lower) towards the key 48.37 level, where the 61.8% retracement level & broken trendline support reside.

E-mini S&P 500 futures have started the 4th quarter with a bang, reaching another all-time high. Speculators, however, pared back more gross longs, nudging the net long position back down to 55% from 56%. While, sentiment and price-action continue to diverge, the fact that the market has cleared the key psychological (2500) threshold, suggests that speculator's still feel relatively optimistic, even at all-time record highs. That said, price-action late last week could hint of a short-term (buying) exhaustion, as Thursday's close was at the extreme high within a solidly bullish day and then Friday left a small inside day. If, there's some downside follow-through next week, at this point it shouldn't last too long, and the overall uptrend should remain in tact while maintaining support ahead of the psychological 2500 region.

Nasdaq 100 futures speculators modestly added back gross & net longs in the latest COT report. This allowed for the net long percentage to inch up from 58% to 59% (into the 3rd of October). The lethargic mood exhibited by non-commercial traders continues to highlight a divergence with Nasdaq 100 futures price-action, which has trended upwards for most of the year. Last week's successful extension through the August and September highs (6020), however, could set the stage for a more meaningful rebound going further. That said, if Nasdaq 100 futures were to quickly retreat back below 6020, it could not only shift technical momentum lower for tech stocks but could provide a drag to equities across the board.

US 10-Year futures bullish sentiment ticked down slightly as non-commercial traders pared back both gross longs and shorts. While the move in sentiment finally correlated with this latest move (down) in US 10-year futures price action, it still underscores the non-participation of large speculators. More importantly, however, the lows seen back in May & July (near 125) were re-tested last week, but were successfully defended by bond bulls as yields briefly touched 2.40% on Friday before pulling back. While this may suggest a near-term bottom (in bond prices), there will have to be immediate follow-through strength to start the new week, otherwise the daily (chart) bull hammer pattern left on Friday will be unconfirmed. That said, if support at 124.77 continues to build, then the short-term focus would likely shift back (higher) to 125.68, which correlates to just under 2.30% in 10-year yields.

US 30-year futures speculators grew more cautious, according to the latest COT report, as the net long percentage dropped from 58% to 52%. Gross longs fell quite significantly to put further separation from the August peak, which then marked the highest levels seen since 2008. The increase in gross shorts also helped drive sentiment lower, which is now starting to positively correlate with the recent (down) trend in price-action. Moreover, with daily (chart) momentum indicators skewed to the downside,a clean break of the July low at 151.50 could expose the May low at 150.24 next.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.