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COT: Dollar shorts squeezed; Shift in commodity exposure from energy and grains to precious metals

Commodities
Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Key points:

  • Our weekly Commitment of Traders update highlights futures positions and changes made by hedge funds across forex and commodities during the week to last Tuesday, 15 October.
  • Speculators dramatically scaled back their dollar short amid geopolitical tensions and US economic data strength lowering the pace, timing and depth of US rate cuts

  • Managed money accounts turned net sellers of most energy and grains contracts, while buying was concentrated in precious metals and softs

Forex:

Speculators scaled back their dollar short against eight IMM futures during a reporting week that saw heightened geopolitical tensions following Iran’s missile strike against Israel, US economic data strength, China releasing a mini-bazooka, and European CPI falling below 2% for the first time in three years. Overall, these events triggered heavy selling of EUR and strong buying of AUD, and by the end of last Tuesday, the dollar short had been reduced by USD 1 billion to USD 13.62 billion.

The AUD position flipped to a 14.5k net long from 40k short just two weeks prior, before several stimuli were announced, while, as mentioned, the prospect of the ECB stepping up its rate-cutting pace helped send the EUR lower, resulting in a 23% reduction in the net long. The JPY saw net selling for the first time in thirteen weeks as USDJPY showed signs of rolling over, with US rate cut optimism fading amid strong US economic data, and Japan’s ruling LD party surprisingly picked Ishiba to be its next leader.

21olh_cot0
Non-commercial IMM futures positions versus the dollar in week to October 15

Commodities:

In the latest reporting week to 15 October, the Bloomberg Commodity Index suffered a 1.6% reversal, with losses in energy, grains, and industrial metals only partly offset by gains in softs and precious metals, where gold, silver, and platinum all performed strongly.

In energy, the geopolitical risk premium evaporated as Israel delayed an expected retaliatory attack against Iran, leaving the market to focus on sluggish demand and the risk of unwanted supply from OPEC+. Elsewhere, industrial metals suffered a setback after traders paused in response to recent stimulus announcements in China and concerns about their ability to steer economic growth back towards the 5% target. The grains sector came under renewed pressure from the prospect of an abundance of supply being harvested in the US, while softs remained in demand, with weather concerns in key production regions underpinning prices and demand for sugar, cocoa, and coffee.

Managed money accounts, such as hedge funds and CTAs, responded to these developments by selling most energy and grains contracts, led by Brent, WTI, natural gas, soybeans, and corn, while buying was concentrated in gold, silver, platinum, RBOB gasoline, and livestock.

21olh_cot2
Managed money long, short and net commodities positions in the week to October 15
21olh_cot3
Energy: Crude oil saw net selling for the first time in three weeks, led by long liquidation in Brent, while a rise in net short positions in the two distillate (diesel) contracts was offset by demand for gasoline. A 9% slump in natural gas triggered a 75% reduction in the net long.
21olh_cot4
Metals: Gold’s record-breaking rally saw buyers return following another elusive correction attempt, which helped support a strong week for silver and platinum, despite some emerging profit-taking in copper, which saw a 24% reduction in the net long.
21olh_cot5
Grains: The first net long position in 13 months proved short-lived after funds flipped their bullish stance across six US grains and oilseeds futures, primarily driven by heavy selling of soybeans and corn amid the prospect of a bumper US crop.
21olh_cot6
Softs: With the exception of cotton and Robusta coffee, the softs sector was once again in demand, supported by strong rallies in sugar, arabica coffee, and cocoa.

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.

Recent commodity articles:

27 Sept 2024: Commodity weekly: Industrial metals gain strength during a week of crude weakness
26 Sept 2024: Crude prices drop again as Saudi and Libya supply concerns grow
24 Sept 2024: Fed and PBOC add momentum to commodities market rebound
23 Sept 2024: COT: Dollar short reduced; Investment metals see strong demand ahead of FOMC
20 Sept 2024: Commodity weekly: Commodities boosted by bumper rate cut
20 Sept 2024 Video: Gold or silver, which metal will perform the best
17 Sept 2024: With gold reaching new heights, silver shows potential
16 Sept 2024: COT: Record short Brent and gas oil positions add upside risks to energy
11 Sept 2024: Crude slumps amid technical selling and recession fears
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
30 Aug 2024: Commodities sector eyes fourth weekly gain amid softer dollar and Fed expectations
27 Aug 2024: Month-long sugar slide pauses amid concerns of Brazil's supply
27 Aug 2024: Libya supply disruptions propel crude prices higher
26 Aug 2024: COT: Funds boost metals investment as dollar long positions halve amid weakness
23 Aug 2024: Commodities Weekly: Metal strength counterbalancing energy and grains
22 Aug 2024: Persistent supply contraints keep cocoa prices elevated
21 Aug 2024: Weak demand focus steers crude towards key support
19 Aug 2024: Resilient gold bulls drive price to fresh record above USD 2500
19 Aug 2024: COT Buyers return to crude as gold stays strong; Historic yen buying
16 Aug 2024: Commodities weekly: Gold strong as China weakness drags on other markets
9 Aug 2024: Commodities weekly: Calm returns to markets, including raw materials

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