Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.
The CoT (Commitment of Traders) report, against conventional belief, does not represent a lagging indicator.
The right interpretation of the data provided, published every Friday at 3:30 p.m. ET, and reflecting the commitments of traders up to the prior Tuesday, offers comprehensive insights to gauge how the smart money is positioned. Large institutions and commercials tend to leave a trail of breadcrumbs along the way, and through the CoT, we can follow what their intentions are, therefore, it should be seen as a valuable resource.
Click here to view a table of the latest legacy report. These reports are broken down by the exchange, with a futures-only report and a combined futures and options report. It is then unpacked into reportable open interest positions for non-commercial (speculators) and commercial traders (hedgers).
Click here to view a table of the latest TIFF report. These reports include financial contracts, such as currencies, U.S. Treasury securities, Eurodollars, stocks, VIX and Bloomberg commodity index. These reports have a futures-only report and a combined futures and options report. The TFF report breaks down the reportable open interest positions into Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables.
Click here to access the historical data. In this section of the CFTC website, any entity or individual is free to download the historical data accumulated over the years of the different classified CoT reports.
Click here to access a 2018 comparison table. This document comprises a handy personal notebook, where I annotate the most recent changes in positioning in order to assist the analysis.
In the following article, based on the Commitment of Traders report, I dig into the latest positioning by options and futures traders from Aug 15th to Aug 21st, an analysis that helps me in gauging ‘forward-looking’ biases in the currency market. Overall, the changes in market positioning ever since the bullish breakout in the DXY (bearish euro/US dollar) continue to signal a market that is supportive of the US dollar, with the recent sell-off in the American currency mainly a result of a removal of liquidity in thin market conditions. I still see little enough evidence to suggest a tuaround in the prevalent US dollar trend, given that the majority of the contracts’ increases in August remain outstanding and were supportive of an eventual resumption in the US dollar trend.
That said, another scenario that is slowly shaping up as a potential outcome worth taking note is the increasing risks of prolonged ‘risk-appetite’ conditions that may continue to affect market sentiment and consequently hit the appeal towards the safe haven status of the US dollar. Any continuation of the risk appetite profile seen in the last 2 weeks and we could be looking at a US dollar market in trouble, which would potentially force a mass liquidation of US dollar longs should key levels be retaken. Not the main scenario.
As an example of factors that may undermine capital flows into the US dollar, it includes a less hawkish Fed as evidenced by the last intervention of its Chairman Jerome Powell at the Jackson Hole Symposium on Friday, renewed strength in the Chinese yuan after the re-introduction of counter-cyclical measures by the PBoC (Central Bank of China), a new NAFTA deal nearing or an easing of tensions in emerging markets. These are all risks building up for the US dollar that should not be taken for granted.
Main Takeaways from the Euro Contract (6E – CME)
Main Takeaways from the Sterling Contract (6B – CME)
Main Takeaways from the Japanese Yen Contract (6J – CME)
Main Takeaways from the Australian Dollar Contract (6A – CME)
How to Be Positioned Going Forward?
It’s undeniable that the majority of market participants in futures and options remain with allocations set to benefit if the US dollar were to appreciate from its current levels. After 2 weeks of recovery in sentiment, the market has come at a crossroad, and what we know for certain is that theEUR/USD is testing its previous multi-month range breakout point and PoC (Point of Control), one that was resolved amid an increase in both volumes and open interest. Therefore, if history is any indication, the most sensible scenario whenever a breakout carries these characteristics tends to be a continuation of the underlying trend as long as the conditions that led to aggressively bet towards the US dollar remain in place.
The question we should ask, therefore, is, do they? Let’s look into what have been the main drivers invigorating the US dollar rally in August, and to what extent the recovery in the EUR/USD (a proxy for DXY) justifies these levels. As illustrated in the chart below, the risk profile has recovered but remains far from the hefty levels seen earlier in the month, the 2-yr German vs US bond yield spread remains largely neutral, the Italian vs German 10-yr yield premium has continued to escalate, while last but not least, the EUR/USD rate is testing the area that saw the most accumulation of volume from June until present time. All these factors argue for therecovery in the exchange rate to be limited from current levels.On the contrary, the 10-yr German vs US bond yield spread has seen a major breakout higher, and that should warrant caution.
At the end of the day, however, I find there are still enough underlying factors that fail to justify higher levels beyond the ‘make-or-break’ resistance area at 1.1650-1.1710. However, if we were to witness a sea change that causes the buy-side to take control of the PoC, the run to the exits by an overly committed long US dollar market could be one to remember. So, have an open mind, adapt to the constant change of conditions, but be well aware that this is where the market stands as of today, Aug 27th.