USD, GBP/USD analysis: Commitment of traders report (COT) – 04/09/2023

Whilst large speculators remained heavily net-short the US 2-year bond bill (it had reached another record high the week prior), they trimmed gross short exposure by -4.7% and increased longs by 7.2%. It is also worth noting that the 2-year yield printed a bearish engulfing week after a failed attempt to break and hold above 5%. And if yields continue to move lower over the coming weeks, it will likely weigh on the US dollar.

Large speculators are slowly loosening their bullish grip on GBP/USD futures, with short exposure rising by 25% last week. AUD/USD traders were their most bearish in 44 weeks ahead of this week’s RBA meeting and GDP report, with odds not only favouring another hold at 4.1% but money markets are beginning to price in their first cut.

Traders are also showing renewed bullish interest in gold and silver.

Commitment of traders – as of Tuesday 2023:

• Net-short exposure to AUD/USD futures rose to an 18-month high (although it is only at a 4-week high when adjusted for open interest)
• Large speculators increased their net-short exposure to JY futures to a 7-week high
• Net-long exposure to gold futures rose for the first week in six among large speculators
• Traders were their most bearish on NZD/USD futures in 44 weeks
• Gross short exposure to GBP/USD futures rose by 25.1%

US 2-year bond note - Commitment of traders (COT):

The US 2-year yield formed a bearish engulfing week after its failed 'bid' to break and hold above 5%.

It's the first bearish engulfing week since the March high.

Large speculators have been pushing net-short exposure to record highs in recent months, although by last Tuesday they had trimmed gross shorts by -4.7% and increased longs by 7.2%. Also note that the 2-year bond seems to have found support around 101 (the 2006 lows).

It's the last week for Fed members to shape the narrative ahead of the blackout period which kicks in on Saturday. If they push the narrative towards higher for longer but done, perhaps we could finally see yields top out? Or perhaps that's wishful thinking. It's certainly a market to watch, regardless. But if yields top out, then so could the US dollar.

USD index futures (DXY) – Commitment of traders (COT):

The US dollar index rose for a seventh consecutive week, although its small gain last week also shows a hesitancy to break higher with an inverted hammer beneath the May and YTD highs. Net-long exposure among large speculators has been trending lower since June 2022, and they are on the cusp of flipping to net-short exposure.

If traders flip to net-short exposure and yields actually do top out, then that paints an upside bias for the likes of AUD/USD, EUR/USD and GBP/USD.

GBP/USD futures – Commitment of traders (COT):

With that said, large speculators remain heavily net-long GBP/USD futures, although they are showing signs of loosening their bullish grip. Gross shorts were increased by 25% last week, and net-long exposure may be topping out. Asset managers are also a lot less bullish than they were a few weeks ago, so perhaps the tide is turning. But if the US dollar underperforms whilst GBP traders trim long exposure, it might make for some choppy trading conditions. But if the US dollar retains strength then perhaps we’ll see a more direct move lower on GBP/USD.