The pairs I want to compare in this week’s COT report are the Euro and the Australian Dollar. Large speculators are at their most bearish in the past year for both (COT index 0%), and the number of short positions is almost identical. Yet, only the Euro is falling, while the Australian Dollar is rising.
The Australian Dollar this week
The Euro and the Australian Dollar are being sold to the same extent
Trends in large speculator net positions (negative values indicate net short).
・September 8: Euro -42,616 contracts / Australian Dollar -34,870 contracts
・September 29: Euro -63,256 contracts / Australian Dollar -63,239 contracts
・October 13: Euro -137,573 contracts / Australian Dollar -117,299 contracts
・October 27: Euro -143,894 contracts / Australian Dollar -128,315 contracts
Over seven weeks, short positions increased by approximately 100,000 for the Euro and 90,000 for the Australian Dollar. Net levels for both are in the bottom 1% of the last five years. The way these short positions have been built up is almost identical, like twins.
Only the Euro fell
Price movements are not aligned. Over the last four weeks, the Euro-Dollar fell 0.85% to 1.1166 dollars, while the Australian Dollar rose 1.51% to end the week at 0.7035 dollars. Even looking at the 13-week period, the Euro-Dollar is down 3.23%, while the Australian Dollar is up 0.59%.
The selling of the Euro is reflected in its price, but the selling of the Australian Dollar is not. If it does not fall even with this much selling accumulated, one must conclude that there is buying somewhere in the market that outweighs that selling.
A way of reading that does not blindly trust large speculator selling
This point was also raised by a prominent individual trader. Even when large speculators build up record short positions, the Australian Dollar does not fall. Therefore, the view is that one should not follow the large speculators, but rather the side that is buying and absorbing that selling. The conclusion was to trade the Euro if following large speculators, but not to force a short on the Australian Dollar, instead capturing gains through a combination of selling the Euro and buying the Australian Dollar.
COT is a tool to see ‘what large speculators are betting on,’ but it does not tell you ‘if the large speculators are correct.’ The point being made is that even with the same 0% index, one must distinguish between assets where the price is following and those where it is not.
Individual positioning also differs between the Euro and the Australian Dollar
Looking at the individual side, there is another difference. Individual long positions in the Euro-Dollar are at 73.97%, with buying concentrated in direct opposition to the large speculators’ selling. The signal is A (strongest sell).
Individual long positions in the Australian Dollar are at 42.77%, with individuals also leaning slightly toward selling. Since both large speculators and individuals are on the same short side, the signal remains at C (sell). The Australian Dollar is in a state where only the selling side is crowded.
For the Dollar-Yen, the large speculator yen buying mentioned in last week’s column increased by another 31,713 contracts, reaching a net of -101,591. Even so, the weekend closing price was 157.52 yen, up 0.45% for the week.
Even when interest rates rose, the Australian Dollar was not bought
The COT data cutoff is Tuesday, October 27. Subsequently, on November 3 at 12:30 PM, the RBA (Reserve Bank of Australia) raised its policy interest rate by 25 basis points to 4.85%. The rate hike was in line with prior expectations, but the decision was 6 to 3, with three members advocating for holding at 4.60%. As the statement also indicated caution regarding an economic slowdown, expectations for additional rate hikes have receded slightly.
The AUD/USD pair approached the announcement at around 0.6995 USD, fell to 0.6973 USD, then recovered slightly and is trading around 0.6983 USD. On the day the interest rate was raised, the Australian dollar was not bought, but rather sold off slightly. Even so, the decline was minor, and it has not collapsed significantly from the weekend level of 0.7035 USD. It is a reaction that lacks a decisive factor, as one cannot say that a mountain of large-scale selling caused a collapse, nor that buying back pushed it higher.
The EUR/USD pair was pushed by dollar selling on the 2nd, rising to 1.1237 USD at one point before closing at 1.1187 USD. The USD/JPY pair rose to 158.00 JPY and closed at 157.94 JPY. On the same day, the 3rd, voting for the U.S. midterm elections begins. Whether the selling of the Australian dollar is correct, or the buying that absorbs it is correct, will be tested further by the price movements following the election.
Speculative Position Dashboard → https://toshibu.com/cftc/
*This article is intended for informational purposes only and does not recommend or solicit the buying or selling of specific financial products or investment methods. Please make final investment decisions at your own responsibility.
