Yen Bulls Bruised by BOJ, But Intervention Could Prove Them Right

Futures traders piled back into the Japanese yen ahead of the Bank of Japan meeting, only for USD/JPY to push higher following a slightly dovish hike. Yet with speculative yen longs at record levels and USD/JPY testing 158, the threat of further intervention could ultimately vindicate those bullish yen bets.

Yen Futures Bulls Face BOJ Setback as USD/JPY Intervention Risk Builds

Large Speculator Positioning from the COT report

Source: CFTC (COT), LSEG

• US Dollar: Net-longs fell by $13.3 billion – the fastest reduction in six years – to just $4.7 billion
• EUR/USD: Large specs reduced net-short exposure by 15k contracts to 27k
• GBP/USD: Asset managers reduced net-short exposure by 16.6k contracts to 89.2k
• USD/JPY: Bulls piled in, with large specs net-longs reaching a record high
• USD/CHF: Large specs increased the gross longs to a 2.5-year high, though remained net-short by 29k contracts
• USD/CAD: Asset managers reduced net-shorts to just 9.4k contracts, though a bullish USD/CAD has defied bullish bets on the Canadian dollar futures market
• AUD/USD: Open interest rose to a record high, with 300k contracts being added over the past 10 weeks
• NZD/USD: Fell for a fourth week despite a continued rise of bullish bets

Asset Manager Positioning | COT Report

Source: CFTC (COT), LSEG

USD/JPY Futures Positioning | COT Report

Yen traders didn’t hold back when they piled into longs last week. Large speculators added bullish bets at their fastest weekly pace on record, increasing by 59k contracts, or 33.1% from the week prior. Combined with asset managers, whose gross longs rose by 41.3k contracts (53.2%), total bullish exposure increased by just over 100k contracts.

While they were clearly betting on a more hawkish BOJ meeting, it may still turn out to have been the correct move – even if ill-timed. USD/JPY has now risen 3.4% in 10 days since the latest MOF intervention, and after testing 158 on Friday, traders may be prudent to remain on standby for further action from Japanese authorities. Particularly if bulls want to take USD/JPY back towards 160 – where authorities were suspected to have last intervened.

Source: CFTC (COT), CME, LSEG

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US Dollar Index (DXY) Futures Positioning | COT Report

The decline in US dollar bullish bets accelerated last week, though price action had other plans. Total net-long exposure to the US dollar fell to just $4.7 billion, with the $13.3 billion weekly reduction marking the fastest decline in net longs in six years. Yet the slightly hawkish FOMC meeting and stronger retail sales helped the US dollar index enjoy its best week in 18 weeks and close at a seven-day high.

Meanwhile, asset managers have reduced their net-long exposure by roughly 50% in six weeks to 10.6k contracts. Large specs reduced theirs to 15.8k contracts.

So, traders remain bullish on the US dollar overall, but have reduced their long exposure considerably. Yet near-term price action could remain supportive of further gains.

Source: CFTC (COT), ICE, LSEG

Commodity FX Futures Positioning: AUD, CAD and NZD

AUD/USD exposure is showing conflicting signals, but on balance it appears to favour a shallow pullback rather than a deeper reversal. While net-short exposure increased among large speculators and asset managers, it was only by around 10k contracts combined, with each cohort holding roughly 40k contracts of bearish exposure.

Meanwhile, total open interest surged to yet another record high. With AUD/USD having risen over the past three months, that points to strong participation alongside the broader uptrend. Moreover, the 10-week increase of nearly 300k contracts in open interest is also a record, which to me makes the relatively modest 10k increase in net shorts less significant.

NZD/USD exposure paints a very different picture to the Australian dollar, as prices have fallen for a fourth consecutive week despite a notable increase in longs. Specifically, gross longs rose to a two-year high of 32.9k contracts, nudging net longs up to 10.5k. While not overly bullish, it did mark the 10th consecutive week of increased bullish exposure, if we include the reduction in net shorts over this period.

Still, large specs added 2.4k shorts – and I suspect we’ll see a rapid increase in such bets in the next COT report. Though at this stage, positioning in NZD/USD futures is surprisingly lagged, with price action and monetary policy expectations providing the more-timely clues.

USD/CAD is not playing nicely with futures traders either, as the Canadian dollar continues to fall despite the recent rise in bullish bets. Hawkish bets have supported the US dollar, while concerns over the latest US-Canada trade dispute have weighed on the loonie despite rising crude oil prices. This is another case where futures traders appear to have been caught off guard, meaning price action and incoming headlines are likely to provide the better gauge of near-term direction for USD/CAD.

Source: CFTC (COT), CME, LSEG