U.S. Dollar Breaks Out As Speculators Reduce Short Bets

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Includes: FXB, FXE, UUP
by: Peter Ruud

Summary

US dollar improves in sentiment.

DXY breaks-out.

Record highs for equities again.

The US dollar surged to 3-month highs amid a (bullish) breakout of an inverse Head & Shoulders pattern. The latest Commitment of Traders (COT) report highlighted a substantial draw-down in positioning against the greenback. Meanwhile, the sell-off in treasuries helped expand interest rate differentials (in favor of the US), but initially spooked equity markets early in the week. Several key earning report beats, however, managed to push stocks once again to fresh all-time highs, with the technology sector leading the way.

The (Japanese) yen carry trade surged this past week, amid a surge in US interest rates and an overall boost in risk appetite. The USD/JPY, which had been on the move up as of late, managed to test key resistance at 114.33, but was rejected by it on Friday. According to the latest COT report, large (non-commercial) speculators increased their gross long & short positions vs. the Japanese currency. The percentage of net longs dipped slightly, however, despite the number of long contracts remaining near their 2017 highs. The trade-weighted Japanese yen fell to a new year-to-date low, but also reversed course Friday, finishing the week modestly lower. According to recent retail FX positioning data, the retail population has become more bullish (in terms of net percentage of contracts), upping their (yen) long positions to 57% at the end of last week. This may explain why the USD/JPY was able to test critical resistance at 114.33. A sustained break would expose 115.00/55 initially to the upside, while a loss of support in the 113.27/36 region (USD/JPY) could stall near-term bullish momentum.

Speculative euro positioning by non-commercial traders dipped again for the 2nd straight week, according to the latest CFTC positioning data. This highlights a pullback from the largest net long position by (non-commercial) speculators on record. The EUR/USD managed to break down out of 3-month head & shoulders pattern last week, which could target the 1.1421/77 region initially. The patterns measured move objective, however, lies near the year's range midpoint at 1.1214. That said, the breakout so far has not put that much room from the pattern's neckline and a sustained push back above 1.1677 could possibly signal a loss in (bearish) momentum.

British pound speculative (bullish) sentiment continues to pull-back quite significantly. According to most recent COT report, large speculators reduced their long positions while maintaining their short positions, allowing for the net long position to drop to 49% from 52%. Meanwhile, the retail FX population upped their net long position to a new 6-month high, highlighting the continued pessimism that retail traders have for the US dollar. While, this is typically bearish for Sterling, recent price-action suggests that weekly technical momentum has stabilized and that a range is forming between 1.30 & 1.36. That said, if 1.3338 (GBP/USD) continues to cap to the upside, attention will remain on the lower end of the range at 1.30, then 1.2774/1.2800 further out to the downside.

Bullish sentiment by Australian dollar (futures) speculators dipped again for the 4th straight week, highlighting a potential turn in sentiment from the record net long position seen back in September. According to the latest retail FX positioning data, the retail trading population continued to expect the AUD to turn around vs. the USD. Price-action traced out a lower top last week just below the .7900 handle (AUD/USD), which suggests that Aussie could be setting-up for a meaningful decline possibly towards the .7329/.7500 region, if .7631 were to be cleanly taken-out to the downside. At this point, it would take a sustained move back above .7730, to help the AUD/USD attempt to stabilize near-term bearish momentum and shift focus back towards the key .7900 area.

Canadian dollar futures speculation has stalled somewhat, but remains extremely high, as positioning yet again persists at the highest level of net longs (by percentage) in nearly 5 years. Meanwhile, the USD/CAD pushed higher last week, highlighting a fresh breakout of trendline resistance and marks a key higher low near 1.2500 for the USD/CAD's ongoing recovery. Moreover, the divergence between (non-commercial) speculative sentiment and price-action is starting to weigh on the Loonie. This suggests that if the USD/CAD can sustain bullish momentum going forward, that large speculators will have continue to capitulate on their extremely bullish (NYSEARCA:CAD) position. That said, Friday's (bullish) rejection at a key range midpoint at 1.2921, suggests that there could be some consolidation heading into the month-end. If pull-backs remain limited to former resistance near 1.2600, however, then the USD/CAD should remain well-positioned for a move towards 1.3000.

Gold futures (bullish) sentiment has continued to wane as of late, but remains at a relatively high level, as the net long percentage of contracts remained at 77%, while the net long total dipped 9K. Meanwhile, Gold futures since recovering off 1264 (61.8% of the latest up-move from July) a few weeks ago, have pulled back to the key Fibonacci retracement again. This is partly due to the retail population, which according to recent positioning data, has remained optimistic towards the yellow metal and remains near the highs of the year. If retail traders continue to accumulate gold, this could highlight a key lower top formation at 1308 (in price-action), which would potentially re-open 1237 ahead of psychological support at 1200. That said, if 1264 continues to support (like it did late last week), expectations for a higher base (at 1262/64) could emerge.

Crude oil futures sentiment remained relatively up-beat, as positioning by futures traders (into October 24th) increased slightly in terms of gross and net long positions. Meanwhile, Crude oil prices thrusted higher last week, reaching levels not seen since March. Friday's move higher also puts the psychological 55 mark back in play, which has capped price-action in 2017. If price-action, however, were to pullback below former resistance at 52.78, then on-going bullish momentum could stall, which could thwart a potential range breakout towards the 2015 highs just above the 60 region.

E-mini S&P 500 futures continue extend strength, reaching all-time highs once again. In the latest COT report, however, futures speculators grew more cautious, substantially increasing their gross short positions. This allowed for the net long position to dip to 56% from 58%, which suggests that speculator's are becoming slightly more skeptical as price-action continues to register record highs week after week. The overall uptrend in S&P 500 futures, while technically overbought (in both daily & weekly indicators) should remain intact while maintaining support ahead of the key 2550 region. That said, if last week late move higher ends up failing to clear 2577 (the previous swing high), then it could set the stage for a well-needed pullback that could help alleviate overbought conditions.

Nasdaq 100 futures speculators re-upped their overall bullish stance in the latest COT report, which had fallen to lowest level (net long) in 2017. It was a stellar week for bulls, first price-action was able to maintain support at 6020 (August and September former highs) earlier in the week, then after a series of strong earnings report, was able to thrust over 2% higher to end the week. While the stage has already been set for sustained strength heading through the heart of the earnings season, there's a chance that Friday's move could have temporarily exhausted strength. That said, only a move below 6125 would potentially stall bull momentum.

US 10-Year futures bullish sentiment edged higher, as non-commercial traders accumulated both gross long and short positions, but added 47K contracts to the net (LONG) total. The move in gross short contracts represents the highest level seen since April, but the aggressive bump-up in long positions suggests futures speculators remain somewhat skeptical towards the run-up in yields. While, there's not much in the form of resistance between 2.40% & 2.60%, the push above 2.40% has been weak, which runs the risk of pulling back within range before attempting a move back towards the highs (in yields). That said, if futures can stay capped by former platform support at 124.83, this would initially expose the 124.00 area next, which correlates roughly to 2.50% for US 10-year yields.

US 30-year futures speculators were once again more cautious, according to the latest COT report, as the net long percentage nudged lower from 58% to 56%. Meanwhile, last week's move in price-action now highlights a potential lower top just ahead the 152 region, and although, selling pressure may have subsided into the weekend, bear momentum seems to be in place for a move back towards 150.20. This is where a ridge of support developed this past spring, which would correlate roughly to 3.00% in US 30-year yields. That said, Friday's (bullish) move in futures price-action does highlight (daily) technical divergence, which could suggest additional ranging before ultimately heading back towards 52-week lows in the 147.27/148.07 region.

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.

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