Key points:

  • Positions and changes made by speculators in commodities and forex in the week to Septermber 17
  • Counter to the prevailing trend of USD weakness, speculators continued to cover short positions; biggest yen long since 2016
  • Gold and silver length reached fresh cycle highs ahead of last week's bumper FOMC rate cut
  • Energy bounce-back hurting the first-ever recorded fund short with focus on Brent and diesel
  • Sugar and coffee in demand as poor weather in Brazil threatens production

Forex:

Counter to the prevailing trend of USD weakness, speculators opted for more USD short covering ahead of last Wednesday’s FOMC meeting. Overall, the gross short against eight major IMM currency pairs was reduced by 29% to USD 9.2 billion, primarily driven by long liquidation in EUR and GBP, and fresh short selling of AUD. Speculators bought JPY for an 11th consecutive week, and during this time it has swung from the biggest short in 17 years to the biggest long since 2016. While the pace slowed, traders nevertheless continued to add length ahead of last week’s FOMC and BOJ meetings. Elsewhere, out-of-favour MXN saw a 70% reduction in the net long to an 18-month low.

Non-commercial IMM futures positions versus the dollar in week to September 17

Commodities:

The latest reporting week to 17 September, which ended the day before the US Federal Reserve started its long-awaited rate-cutting cycle, saw broad support for commodities, with the Bloomberg Commodity Index rising 4%. The combination of a softer USD and the prospect of lower funding costs were the overall supportive drivers, while specific developments supported the individual sectors.

Examples include the softs sector, where sugar was heading for its biggest weekly jump in 16 years while coffee prices spiked, both in response to weather worries in Brazil. The industrial metal sector found support from the general risk-on sentiment ahead of the US rate cut and signs of an improved demand outlook in China, leading to rising premiums on imported copper while inventories on the SHFE have started to fall. The recent sell-off across the energy sector, most notably in crude and diesel, ran out of steam, thereby forcing a part reversal of recent short selling which, in the previous week, drove the overall total exposure in six major crude and fuel product futures to a record low, reflecting a market where investors had started to price in a US recession, thereby turning more negative on the outlook for growth and demand than during the Great Financial Crisis in 2008 and the pandemic in early 2020.

On an individual contract level, buyers focused on WTI, gold, silver, platinum, sugar, and coffee, while a limited number of contracts saw net selling, most notably continued short selling in the two diesel contracts.

Managed money long, short and net commodities positions in the week to September 17
Energy: In a week that saw the BCOM Energy Index ex NG rise 4.1%, managed money accounts held onto a net short position across six major crude and fuel futures contracts. The bulk of the short was held in Gasoil (-73k) and ULSD (-45k), while crude was mixed with a WTI long (+91k) offsetting a Brent short (-42k)
Metals: The gold long reached a fresh 3½-year high at 253k, while a 56% jump in the silver long lifted the net to a 2½-year high at 42.3k. Platinum flipped to a net long, while a 15% rally in palladium helped trigger aggressive short covering. The copper long reached a nine-week high at 22.3k contracts.
Grains: A fifth week of net buying, albeit at a slower pace, was led by soybeans and wheat, while corn saw a small amount of net selling after weeks of buying had cut the net short by 63% to 135k contracts.
Softs: Hot and dry weather in Brazil was the main focus in softs, and it helped lift the sugar price by 8.5% and the net long by 85%, while the Arabica coffee contract also saw net buying.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.

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