USD Longs Slashed, CAD Flips Net Long, No More Shorts to Fuel GBP/USD Rise

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US Dollar, GBP/USD, USD/CAD COT Report –Analysis

• USD Longs Slashed
• CAD Flips Net Long, Asymmetrical Risks Increase
• No More Short Squeeze Fuel for GBP

USD Longs Slashed, CAD Flips Net Long, No More Shorts to Fuel GBP/USD Rise – COT Report

In the week through to January 14th, a third of net US Dollar long positions had been slashed having dropped $6.87bln. This marks the largest decline in USD exposure since June 2020 with net longs now at the lowest in four months. This somewhat underscores the fact that the US Dollar has seen a rather tame reaction to the repricing in the Fed’s outlook over the last two weeks, where the consensus is now for a March hike, followed by three additional hikes for 2022, alongside, quantitative tightening. Among the factors that have been behind the muted USD performance, despite risk appetite souring has been due to US equity outflows, particularly from the heavyweight tech stocks. Meanwhile, there is a risk at the upcoming Fed meeting that the Bank fail to match up to the lofty hawkish expectations and thus, should this be realised, the USD can be expected to pull back. Elsewhere, with geopolitical tensions surrounding Russia gaining traction, the Japanese Yen or Swiss Franc would be better options for playing the safe-haven trade.

Across the commodity currencies, traders flipped net long in the Canadian Dollar for the first time since November. The highlight for CAD will be Wednesday’s BoC meeting where markets are 80% priced in for a rate hike. However, what is interesting is the fact that the Reuters poll shows only 7/31 economists calling for a hike next week. As such, should the BoC raise rates, it is likely that there will be an initial spike higher, although, this could be somewhat limited given how aggressive money market pricing is for the BoC with 142bps of tightening priced in. In turn, my view is that there is an asymmetrical risk to the Canadian Dollar given the high bar to surprise on the hawkish side raises the risk of disappointment. That said, should we see risk appetite stabilise, I favour AUD over CAD.

GBP net shorts have been unwound, which had been providing much of the fuel for GBP upside in recent weeks. However, in light of the cleansing of positioning, the Pound may be more vulnerable to the increased political noise surrounding PM Johnson. This week will likely see the Sue Gray report released, which will be critical in dictating whether Boris Johnson stays on as PM or not.

Weekly FX Positioning

Source: CFTC, DailyFX (Covers up to January 18th, released December 21st)

The Analytical Abilities of the COT Report

How to Read the CFTC Report

US Dollar Positioning

Source: Refinitiv, DailyFX

USD/CAD Positioning

Source: Refinitiv, DailyFX

GBP/USD Positioning

Source: Refinitiv, DailyFX

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Jan 24, 2022  |   Justin McQueen, Strategist. DailyFX