COT: Commodities see broad demand from speculators as the USD slumps to a net short COT: Commodities see broad demand from speculators as the USD slumps to a net short COT: Commodities see broad demand from speculators as the USD slumps to a net short

COT: Commodities see broad demand from speculators as the USD slumps to a net short

Ole Hansen

Head of Commodity Strategy

Key points:

  • Positions and changes made by speculators in commodities and forex in the week to August 27
  • Dollar position flips to a net short following biggest week of selling since March 2020
  • Broad commodity buying supported by softer dollar, Libya disruption and weather worries
  • Buyers focusing mainly on Brent, silver, copper, soybeans and sugar

Forex:

In the week to 27 August, continued dollar weakness helped trigger the biggest week of dollar selling since March 2020. The net sales of USD 13 billion versus eight IMM currency futures flipped the net USD position to a net short of USD 8 billion, the biggest since January. All currencies except the MXN saw net buying, and apart from notable buying of GBP and AUD, the change was led by the euro, where trades increased their net long by 66% ahead of the failed attempt to mount a challenge at EUR 1.12. Elsewhere, CAD saw a massive amount of short covering, but overall it remained the most shorted currency against the dollar. Buying of JPY continued, albeit at a much-reduced pace, with the net long reaching a fresh 3½-year high.

Non-commercial IMM futures positions versus the dollar in week to August 27
The aggregate dollar position flipping to a net short for the first time since January

Commodities:

Large speculators, such as hedge funds and CTAs, turned broad buyers of commodities in the week to 27 August, overall supporting a 1% increase in the Bloomberg Commodity Index, which tracks a basket of 24 major commodity futures, all of which are tracked in this update. Excluding natural gas, which slumped by 10.5%, the index traded up 1.7%, with 22 out of 26 futures seeing net buying.

While the softer dollar provided a generally commodity-friendly backdrop, we saw several developments support the individual sectors and commodities. The energy sector received a boost—short-term as it turned out—from Libya’s supply disruption, while weather developments, especially in the US and Brazil helped support key food commodities from grains to sugar, cocoa, and coffee. Elsewhere, gold had a quiet week, trading near a record high after Jerome Powell, the Fed chair, confirmed a US rate cut was on the agenda at this month’s FOMC meeting. Silver, meanwhile, enjoyed the tailwind from a recovering industrial metals sector, not least copper, before running into firm resistance above USD 30.

Overall, these developments saw hedge funds being net buyers of all sectors, led by grains and softs, while on an individual basis, demand was strongest for crude oil, especially Brent, silver, copper, soybeans, and sugar.

Managed money long, short and net commodities positions in the week to August 27
Energy: Fresh longs helped lift the Brent net long by 31% to 81k, while demand for WTI was relatively muted. Overall, the combined net long at 267k remains near the bottom of the long-term range due to relatively weak price action, as traders remain sceptical about crude’s upside potential amid OPEC+ production increases and China’s demand softness. The nat gas long more than halved as prices tanked by 10%.
Metals: Gold had a very quiet week, with near-record price levels not attracting any profit-taking from funds holding an elevated net long. Silver length increased by 10%, while recent short sellers continued to get squeezed in copper, driving up the net long by 35% to 19k contracts.
Grains: Despite a fresh round of short covering, the grains net short remains near record levels amid the prospect of a bumper crop being added on top of leftovers from last year’s bumper harvest. In nominal terms, the soybean short is valued at USD 9 billion, followed by corn at USD 5 billion.
Softs: Fires across Brazilian sugar cane fields helped drive a near 12% price surge, forcing speculators to abandon recently established short positions. Overall, the net flipped back to a long following the most aggressive buying spree since January last year. Cocoa and coffee rallies attracted a small increase in net longs, while cotton short covering reduced the net short to a five-week low

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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