COT: Dollar short and commodity longs cut on U.S. yield spike

Ole Hansen

Head of Commodity Strategy

Summary:  Futures positions held and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 2. The period included the February 25 wash-out in bonds that saw US ten-year yields and the dollar jump while stocks and commodities traded lower on rising deleveraging risks. As a result hedge funds made their biggest one-week reduction in bullish commodity bets since mid-November


Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, March 2. The period included the February 25 wash-out in bonds that saw US ten-year yields jump to 1.61% in response to muted demand at a seven-year auction. The move saw equities tumble as higher borrowing costs made it harder to justify soaring valuations while the dollar bulldozed most of its peers rising to near a three-month high. Commodities traded lower and despite current strong fundamentals, the market worried rising bond yields could trigger a reduction in the near record speculative long held by funds.   

Commodities

Speculators made their biggest one-week reduction in bullish commodity bets since mid-November. Despite reflation focus and strengthening fundamentals the bond market rout and a stronger dollar led to fresh concerns that deleveraging could spread to commodities. The total net long across 26 major commodity futures was cut by 4% to 2.7 million lots, representing a nominal value of $132.3 billion.

All but a handful of contracts were sold with the biggest reduction hitting gold, soybeans and corn while the most noticeable buying interest benefitted cocoa and wheat.

Energy: Crude oil traded lower during the week to March 2 with profit taking emerging as the dollar strengthened and expectations rose that OPEC+ at their meeting on March 4 meeting would increase production by up to 1.5 million barrels from April. The weakness, however, only triggered a small amount of risk reduction from funds with the combined net-long in WTI (-3.7k) and Brent (-3.8k) being reduced to 728k lots. With the net-long staying close to the highest level since October 2018, the 7.6k reduction was however the biggest on a weekly basis since early November, just before vaccine news helped kick start the 80% rally seen since then.

Metals: In gold, the continued loss of momentum in response to rising real yields, especially following the slump below $1760/oz, helped drive a continued fund exodus. The net long slumped by one-third to a 22-month low at 57.9k lots on a combination of long liquidation and fresh short selling, a developments that saw the long-short ratio drop below 2 for the first time since May 2019. In silver and platinum, selling has been more subdued given the tailwind from industrial metals and with that some relative strength against gold. The net-long in both was reduced by around 20% to the a seven and a one-month low respectively.

Profit taking continued in HG copper and despite rising 1% on the week, the net long was cut for a second week to 65.5k lots, the lowest since August. Just ahead of Thursday when the break below support at $4.04/lb triggered a rapid slump to $3.85/lb before recovering.

Agriculture: The grains sector with the exception of CBOT wheat was sold on a combination of general risk reduction and the stronger dollar. Biggest reductions in soybeans (-16.8k) followed by corn (-12.6k). Soft commodities were mixed following a couple of weeks of net buying with the most noticeable change being an 83% increase in the cocoa long and a 9% reduction in cotton after the price found resistance ahead of the 2018 high at 95.60 cents per pound. 

Forex

Despite bulldozing most of its peers in response to rising real yields, the dollar short against ten IMM currency futures and the Dollar Index only saw a five percent reduction to $29.6 billion, the lowest since mid-December. As in previous weeks, the main contributors to dollar short covering came from EUR and JPY where speculators cut longs by 3 billion dollar equivalent. The euro long was  reduced to an eight-month low as it struggled to hold above support at €1.1950, a level that it eventually broke on Friday.

The explanation for not seeing a bigger reduction in the dollar short can be found in the continued commodity rally, which lifted long positions in CAD by 68% while the AUD reverted to a net-long for the first time in five weeks. Speculators extended their buying of Sterling into a fifth week and the 16% increase to 36k lots was the biggest bet in three-years. This despite emerging signs that the strong run of gains during February had started to run out of steam.

Financials

Traders in U.S. interest rate futures made sharp changes in positioning across the curve in the week to March 2. The period included the February 25 wash-out that was sparked by a disastrous 7-year note auction. Please note the data below reflects positions held by leveraged funds, who often hold some of their futures exposure as spreads against other interest rate products, and due to this we often find them buying into bond weakness while selling into strength. The bulk of the opposite position tends to be held by asset managers/institutional and dealer/intermediaries.

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 reasons why we focus primarily on the behavior of the highlighted groups 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

 

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