COT update: Crowded positioning across assets raises the risk of countertrends

Hedge funds have increasingly aligned behind the higher-for-longer narrative, driving significant positioning across FX and rates while sharply reducing participation in commodities.

Our weekly Commitment of Traders update, based on data published by the CFTC and ICE Europe, highlights hedge fund and other speculative futures positioning across commodities, foreign exchange, and rates during the week ending Tuesday, 23 June.

The latest report shows investors becoming increasingly committed to one dominant macro narrative. Inflation concerns, speculation over higher interest rates, a stronger US dollar, the Federal Reserve’s hawkish shift and the recent Middle East peace agreement have together driven increasingly one-sided positioning across several asset classes.

While the underlying macro developments continue to justify much of this repositioning, markets have now reached levels where positioning itself deserves attention. When speculative exposure becomes either heavily concentrated or overly cautious, markets often become more vulnerable to sharp countertrend moves if the prevailing narrative begins to change. This risk may be amplified as markets approach the peak summer holiday period, when liquidity and participation typically decline.

Dollar long hits seven-year high

In foreign exchange, dollar buying continued during the reporting week, with the greenback gaining 1.5% following the Fed’s hawkish shift and renewed political uncertainty in the UK, which triggered another wave of sterling selling. The aggregate IMM net long dollar position against eight major currency futures increased 18% to USD 34.5 billion, surpassing the previous 2024 peak and reaching its highest level in seven years. The move represents a remarkable reversal from the USD 20 billion net short held before the Middle East conflict.

Apart from modest short covering in the Japanese yen, demand for the dollar remained broad-based. Sterling experienced the largest adjustment, with the net short position jumping 48% to a nine-year high of 106,000 contracts, equivalent to USD 8.7 billion. By the end of the reporting week, only two currencies still maintained net speculative longs against the dollar: the euro with 30,000 contracts and the Mexican peso with 74,000 contracts, together representing around USD 6.4 billion. These positions stood against a combined USD 41 billion net dollar long versus the remaining six IMM currencies.

SOFR short reaches another record

Outside forex and commodities mentioned below, positioning in US interest rate markets has also become increasingly one-sided with the leveraged fund short position in SOFR futures climbing to another record high of 2.97 million contracts, equivalent to more than USD 700 billion in notional exposure. The position has more than doubled during the past two months as higher energy prices and firmer inflation expectations encouraged markets to embrace the Fed’s higher-for-longer message following the June FOMC meeting.

Because SOFR futures move inversely to expected short-term interest rates, a short position effectively represents expectations that policy rates and funding costs will remain elevated or move even higher. Combined with the seven-year high dollar long and the sharp reduction in commodity exposure, the latest COT report suggests hedge funds have become unusually aligned behind one macro outcome.

Should the recent decline in energy prices help ease inflation expectations, or if the dollar weakens and markets begin to price a less hawkish Federal Reserve, these increasingly crowded positions could become vulnerable to a broad and potentially sharp repositioning across multiple asset classes.

Commodity liquidation accelerates

Another week of broad commodity weakness, which saw the Bloomberg Commodity Index fall 2.5%, triggered a fifth consecutive week of aggressive selling by managed money accounts.

During the past five weeks, the combined net long across the 25 major commodity futures tracked in this report has collapsed by 73% to just 478,000 contracts. Although this provides a useful gauge of investor sentiment, it does not fully capture changes in capital exposure because energy and metals carry substantially larger contract values than agricultural futures.

The speed of the reduction illustrates how rapidly investor sentiment has deteriorated as stronger dollar conditions, higher funding cost expectations and the recent tumble in energy prices have weighed on that sector but also grains, oilseeds and sugar through their biofuel and ethanol links to fuel prices, all encouraging broad risk reduction.

Energy longs continue to unwind

In nominal terms, the energy markets remained the main source of liquidation as traders adjust positioning away from the biggest disruption in living memory to a near-term oversupply as a mini-tsunami of barrels are being released from the Persian Gulf.

The combined hedge fund net long across WTI and Brent crude oil futures fell by another 36,300 contracts to 178,800 contracts, the lowest level in six months and 68% below the March peak when Middle East war and closure of the Strait of Hormuz drove prices sharply higher and encouraged expectations of an increasingly tight oil market.

The scale of the recent reduction in net positioning, driven not only by fundamental changes but also by a sharp deterioration in the technical outlook, has encouraged a major build-up in gross short positions in Brent to near record levels.

Metals show surprising resilience

Despite another difficult week for prices, speculative positioning across industrial and precious metals remained relatively stable.

This suggests hedge funds have so far shown relatively limited appetite to chase prices materially lower, potentially reflecting the view that the recent correction remains driven more by macro developments than a deterioration in longer-term supply and demand fundamentals.

Copper, which briefly broke below important technical support near USD 6.15 per pound, only experienced a modest 3% reduction in an already elevated net long position.

Agriculture completes a dramatic reversal

Agriculture once again accounted for the largest share of speculative liquidation. Since reaching a four-year high of more than one million contracts only last month, the combined net position across 13 major agricultural futures has swung to a net short of 49,000 contracts.

The reversal has primarily been driven by an 867,000-contract reduction in bullish exposure across corn, soybeans and wheat, leaving the combined grain position close to neutral. Additional selling in sugar and lean hogs was only partly offset by renewed buying in cocoa, coffee and cotton.

The speed of this reversal highlights how rapidly speculative sentiment has shifted as favourable weather, lower energy prices reducing bio-fuel linked support, improved crop prospects and a stronger dollar encouraged widespread long liquidation across the agricultural sector. However, with positioning now much lighter, the market may be more sensitive to any adverse weather developments during the critical growing season for corn and soybeans, potentially increasing the risk of a rebound in prices.

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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