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U.S. Dollar And Treasury Yields Pull Back, EUR/USD Forms Potential Head-And-Shoulders Pattern

by: Peter Ruud

USD and Treasury yields pull back.

EUR/USD forms a head-and-shoulders pattern.

Equities at all-time highs again.

The US dollar pulled back last week after having registered 4 straight weeks of gains, amid the first weekly fall in US Treasury yields in over a month. The latest Commitment of Traders (COT) report highlighted the 3rd straight weekly increase in the (yen) carry trade, and another record in euro futures positioning. Meanwhile, a potential head & shoulders pattern looms over the EUR/USD, which could have bearish implications if confirmed. And finally, US equities continue to break-out to fresh record highs, highlighting the continued optimism amongst futures speculators despite being technically overbought.

The (Japanese) yen carry trade continued to surge, according to the latest COT (Commitment of Traders) report, as non-commercial speculators significantly increased their bearish bets vs the Japanese currency for the 3rd straight week. The percentage of net longs declined to 25%, as long contracts finally saw a dip from their 2017 highs. The Japanese yen recovered modestly last week vs a trade-weighted basket of currencies, however, but again remained close to it's recent year-to-date low. According to recent retail FX positioning data, the retail population had become more bullish (in terms of net percentage of contracts), upping their (yen) long positions to 57% at the start of last week, but subsequently pared back their net long position. This may explain why the USD/JPY has pulled back from above the 113.00 level (USD/JPY) recently. Both times (in May & July), when retail FX traders reached 53% & 54% net long, the USD/JPY also swiftly reversed course, marking a significant swing high in both instances. This is similar to what happened last week and portends further near-term weakness. While, technical (weekly & daily) indicators have turned lower, only a sustained loss of the support in the 111.00 region (USD/JPY) would shift overall momentum back to the downside and re-open the 109.54/110.36 area to the downside.

Speculative euro positioning by non-commercial traders continued to modestly improve, according to the latest COT data. This marks a string of fresh all-time highs (in terms bullish sentiment), highlighting the largest net long position by (non-commercial) speculators on record. The EUR/USD has managed to stabilize after reaching a fresh 3-month low the prior week. This may have been be partly driven by the retail FX population, which according to recent (retail FX trading) positioning data, had recently begun to buy euros up until the beginning of last week. It seems that retail traders are a bit confused on the direction of the euro, as they capitulated on their bullish bets last week once the euro probed beneath 1.17 (vs the USD), but then re-bought once again towards the end of last week. This suggests that more choppiness in price-action could persist while a key technical pattern continues to play-out. A large head & shoulders pattern is forming on daily charts and is potentially tracing-out the right shoulder right now. If key support at 1.1677 is cleanly broken, the bearish pattern will confirm a technical break-down, which would quickly target the 1.1421/77 region initially. That said, a sustained push above 1.1900 would potentially negate the bearish pattern and shift momentum back to the upside.

British pound speculative (bullish) sentiment waned for the first time in weeks despite increased expectations of a rate hike at the next MPC meeting. According to most recent COT report, large (non-commercial) speculators increased their short positions after having seen them decline by nearly half in the last month. Meanwhile, the retail FX population continues to buy the pound, highlighting the highest level of optimism since April. While, this is typically a bearish headwind for Sterling, last week's price-action suggests that weekly technical momentum has stabilized. That said, if 1.3338 (GBP/USD) continues to cap to the upside, then momentum could quickly shift back (lower) towards the key psychological 1.30 threshold.

Bullish sentiment by Australian dollar (large futures) speculators dipped again slightly for the 2nd straight week, but continues to hover near the recent record net long position. According to the latest retail FX positioning data, the retail trading population backed-off from recent bullishness towards the AUD. Price-action, however, has highlighted a weekly selling exhaustion (the previous week), that suggests that Aussie was technically oversold. That said, only back a sustained move back above .7879 would help the AUD/USD attempt to stabilize near-term bearish momentum and shift focus back to the psychological .8000 threshold.

Canadian dollar (non-commercial) speculation remains extremely high, as positioning inched higher, yet again marking the highest level of net longs (by percentage) in nearly 5 years. Meanwhile, the USD/CAD has traded sideways the past few weeks since recovering off recent 2-year lows. The divergence between (non-commercial) speculative sentiment and price-action is still obvious, as the Loonie has declined overall the past few weeks while the net long position by futures speculators has moved to extreme highs. That said, the USD/CAD's recovery still looks to be a mere (upward) correction within the latest 5-month downtrend and last week's technical bearish engulfing pattern, if confirmed, could hint of a resumption of weakness for the USD/CAD. Sustained weakness below 1.2392 would quickly expose 1.2266/1.2329, while a clean (upside) break of 1.26 would re-open the 1.2717/75 region.

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 5th straight week. Meanwhile, Gold futures since testing a key (Fibonacci) retracement at 1264 (61.8% of the latest up-move from July) has steadily recovered. This may be partly due to the retail population, which according to recent positioning data, started to sell the yellow metal last week. If this newly formed trend continues, then gold futures could climb back towards 1321/33 if the range midpoint at 1310 is cleared to the upside. That said, if the latest recovery were to stall ahead (or near) of the 1321 region, technically-speaking it could have longer-term (bearish) ramifications.

Crude oil futures sentiment declined for the 2nd straight week, as positioning by futures traders (into October 10th) decreased in terms of gross and net long positions. Meanwhile, Crude oil prices recovered from the prior week's selling exhaustion, which has highlighted support at 49.23, the exact (near-term) range midpoint (50% of 45.59-52.87). Moreover, last week's price-action nearly engulfed the prior week's decline, and if confirmed with follow-through strength next week, the Crude prices could quickly escalate back towards 53.72/54.84. That said, if 52.83 is not cleared to the upside, then bear momentum could re-ignite a test support in the 49.03/25 region once again.

E-mini S&P 500 futures continue to defy gravity, reaching another all-time high. Speculators grew more optimistic by substantially decreasing their gross short positions. This allowed for the net long position to bump up from 55% to 57%, which suggests that speculator's still feel relatively optimistic, even at all-time record highs. The overall uptrend in S&P 500 futures, while technically overbought (in both daily & weekly indicators) should remain in tact while maintaining support ahead of the psychological 2500 region.

Nasdaq 100 futures speculators made modest adjustments for the 2nd straight week in the latest COT report. The lethargic mood exhibited by non-commercial traders continues to highlight the divergence with Nasdaq 100 futures price-action, which has trended upwards for most of the year. That said. with the recent successful extension through the August and September highs (6020), the stage has already been set for sustained strength heading into earnings season. Only a retreat back below 6020, at this point, would potentially stall bull momentum.

US 10-Year futures bullish sentiment declined slightly as non-commercial traders pared back both gross and net longs. The move in sentiment is playing catch-up with recent weakness in US 10-year futures price action, despite the successful defense of the May & July lows (near 125) by bond bulls. While this may suggest a near-term bottom (in bond prices), the fact that bond prices finished the week at the extreme highs, serves warning of a temporary buying exhaustion. That said, a potential base in price-action has been made and near-term momentum could re-focus the 126.11 area which correlates to the 2.20% region in US 10-year yields.

US 30-year futures speculators were less cautious, according to the latest COT report, as the net long percentage nudged higher to 54% from 52%. Gross longs were added, stalling the decline from the August peak, which then marked the highest levels seen since 2008. Meanwhile, the recovery made in price-action now highlights a growing base just under the 152 region, and although, buying pressure may have temporarily exhausted into the weekend, bull momentum seems to be in place for a move back towards 155, which coincides with the late-September swing high and roughly 2.75% in US 30-year yields.

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.