Head of Commodity Strategy
In FX, several poorly timed trades defined the week through last Tuesday, when the USD initially weakened further before rebounding sharply to a five-week high. The reversal followed inflation reports showing sharp increases in both consumer and producer prices, with April readings rising at the fastest pace in several years. This helped trigger the worst weekly bond market selloff in a year, as the war-driven price shock raised concerns that central banks, including the Fed, may ultimately be forced to raise interest rates to contain inflationary pressures. In addition, the dollar’s post-reporting-week rally received further support from rising crude oil prices after the US-China summit failed to deliver any meaningful progress toward ending the Iran conflict.
Ahead of these risk-off developments, which ultimately supported the dollar, speculators had cut their USD longs by another third to just USD 5 billion, down from USD 17.6 billion five weeks earlier. Several of the major positioning shifts proved poorly timed, led by a 25% increase in the EUR long, a one-third reduction in the GBP short, and an AUD long reaching a fresh 13-year high ahead of Friday’s sharp decline. One move speculators did get right was turning renewed sellers of JPY after the recent BOJ intervention scare failed to support the yen, instead allowing USDJPY to move back toward 160.
The BCOM Index gained 1.5% during the reporting week before US inflation-led market turmoil triggered end-of-week volatility across bond yields, the dollar, and not least key commodities, particularly recently strong-performing investment and industrial metals. During the reporting week, relatively stable, yet elevated, energy prices initially supported a strong but ultimately temporary rally across metals, led by the semi-industrial precious metals silver and platinum, alongside copper. Elsewhere, strength in grains was driven by surging wheat prices following weather and supply concerns, while softs continued to benefit from demand for sugar and cotton due to their close link to rising fuel prices and biofuel-related demand dynamics. Livestock moved lower, led by weakness in cattle futures following a period of strong gains. Key points from the COT report: • Crude oil: The combined net long fell by 39k to 441k contracts, a nine-week low. After reaching a four-year high of 554k contracts during the week ending 20 March, the position has since declined by 112k contracts, with roughly two-thirds of the reduction driven by rising gross short positions. This suggests that despite ongoing supply concerns and elevated prices, some traders have become increasingly reluctant to chase additional upside at current levels. • Silver: Net length jumped 48% to 16.2k contracts after the break above USD 82.7 triggered fresh momentum and technical buying from funds. Given that the rally appeared to be driven more by technical developments than a material shift in fundamentals, these flows also help explain the aggressive end-of-week sell-off after prices slipped back below USD 83 amid inflation-driven pressure on yields, the dollar, and rate expectations. The speed of the reversal once technical support failed highlights the continued tactical nature of leveraged participation. • HG copper: Seven consecutive weeks of buying lifted the net long close to a one-year high of 73.5k contracts. However, with much of the recent buying occurring above USD 6.30, a level prices fell back below on Friday, some position squaring may have been triggered. The recent build-up also leaves copper vulnerable to periods of liquidation should macro sentiment temporarily outweigh still supportive longer-term fundamentals. • Corn: Profit-taking emerged despite prices ending the reporting week largely unchanged, potentially reflecting a market struggling to identify a fresh directional catalyst following recent volatility across agricultural markets. • CBOT wheat: Hedge funds sold into the WASDE-led 8% rally, primarily through fresh short selling, highlighting a long-standing reluctance among leveraged funds to establish long positions in a market burdened by elevated contango. While the annualized roll headwind has eased from around 12%, it still remains elevated near 8.7%, reducing the attractiveness of maintaining outright long exposure with further signs of a tightening supply needed to change that behavior. • Cotton: Continued buying since the start of the Middle East conflict lifted the net long to a fresh two-year high of 59.6k contracts. In addition to concerns around supply and production costs, cotton has continued to draw support from its indirect relationship with energy prices given competition with synthetic oil-based fibres.
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:
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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