WTI crude oil, EUR/USD analysis: Commitment of traders report (COT)

Weekly adjustments among forex majors were in the mild side, but then that is to be expected given the time of year.

Large speculators continued to favour the Dow Jones over the Nasdaq 100, and increase their net-short exposure to the Dow Jones and increase net-short exposure to the Nasdaq. Whilst the 3-month percent rank has reached 100% on the 3-month on the Dow Jones, it is far from a sentiment extreme as traders are only net-long by 1.6k contracts.

WTI crude oil has continued to rally, only we’re now seeing gross longs increase whilst gross shorts are covered, which underscores the strength of the move up to the April highs.

GBP traders reduced gross longs and shorts for a second week ahead of the BOE’s meeting, and their relatively dovish 25bp hike might see some of those bears return to the table (especially if we see weaker data among GDP, industrial/manufacturing/construction data on Friday).

It’s also the first week in several that net-short exposure to the US 2-year yield has not printed a new record high. Whilst the reduction of shorts and increase of longs was modest, it is the first week in nine that we’ve seen that pattern – so may we are at (or very near to) an inflection point for market positioning.  And if net-short exposure to bonds continues to fall, it indicates limited upside for yields (and therefore the US dollar).

Commitment of traders (forex) – as of Tuesday 1^st August 2023:

• Only minor adjustments were made last week across forex major pairs, with all net exposure changes all falling below +/-10k contracts
• Net-short exposure to the US dollar index (DXY) fell to its least bullish level since July 2021 (back when it was actually net short)
• Large speculators flipped to net-long exposure to NZD futures
• Net-long exposure to GBP/USD futures fell for a second consecutive week after reaching a sentiment extreme
• Net-long exposure to CAD/USD futures rose to an 11-month high

Euro dollar futures (EUR/USD) – Commitment of traders (COT):

We highlighted the potential for a sentiment extreme on EUR/USD a couple of months ago, as net-long exposure had reached levels usually associated with turning points. Whilst it coincided with a top on EUR/USD and shallow pullback, it’s worth noting that there is no immediate appetite to get short among large speculators. In fact, gross-short exposure to EUR/USD futures fell to its lowest level since December 2020 last week and, whilst gross longs fell for a second week, net-long exposure still remains elevated.

Commitment of traders (indices, bonds) – as of Tuesday 1^st August 2023:

• Net-short exposure to Nasdaq futures rose to a 17-week high
• Large speculators were net-long DJI futures for a second week, and at their most bullish level since January 2022
• Net-short exposure to S&P 500 futures fell to a 20-week low
• Net-short exposure to the 30-day Fed Fund futures fell to a 4-week low, to suggest bets of another hie are being scaled back

Commitment of traders (commodities) – as of Tuesday 1^st August 2023:

• Net-short exposure to palladium futures reached a fresh record high
• Managed funds trimmed net-long exposure to gold and silver futures for a second week (higher gross shorts, fewer gross longs)
• Large speculators were their most bullish on WTI futures in 15 weeks, managed funds were their most bullish in a year

WTI Crude oil future (CL) - Commitment of traders (COT):

WTI crude oil has risen nearly 25% since its triple bottom formed in June. We had warned of its potential to rally, given net-long exposure had fallen to an 11-year low among large speculators. Since then, large speculators and managed funds began to cover their shorts and more recently we have seen a pickup of gross longs, which is the ideal scenario for a healthy bullish trend. And that is no surprise given headlines of extended production cuts and hopes that the latest round of China’s stimulus will revive the weaker economy.

The daily chart shows a strong rally from the June lows, although the rally has paused just beneath the YTD (year to date) high of 85.53. Given the level’s significance, a consolidation or retracement seems plausible.