COT Report Data 09 07 2010

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Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: With the expiration of the Sept futures contract this coming Wednesday the 15th, it was surprising to see that the open interest (OI) is still increasing.  For the week the total OI was up 15,415 contracts.  The biggest increase was in the A$, 23,123, followed by the SF with 10,309 contracts.  We can understand the build up in the SF is an anti euro/dollar position, but what is going on in the A$?  The euro, pound and the C$ were all liquidating.

Total spec positions increased their positions on the short side of the USD.  Total long something else and short the USD increased from 79,766 contracts to 108,204 contracts.  The biggest bets against the USD were in the A$, the yen and the SF.  Specs are long the DI, and long the USD and short the euro and the pound.

The largest small spec long positions, as a percentage of the total market is in the C$ at 32%, the Swiss Franc at 27.1% and the A$ with 20.3%.  Biggest short positions by the small guy is in the pound 22.4, euro 21.8 and the yen at 20.9.

The large spec's biggest share of the long side of a market continues to be in the DI, with 70.5%, followed by the A$ 52.6, and the NZ$, 52.5%.  On the short side the big specs have their biggest share of the market in the euro, 25.7%, the pound 23.3% and the C$ with 23.2% of the OI.

It would be nice if analysis of the COT report would give us clear signals, but such is not the case.  The best we can hope for are clues of what might happen.  Money flow is all important, and a steady continuation of money into a currency, commodity or stock gets a market moving.  Recently money has aggressively flowed into the long side of the SF by the specs as an antidote for a declining USD or euro.  It is doubtful this SF will be the currency for the next decade.  Also watch the money flow and the OI change in the pound.  Will specs increase their short?  It does not look like it would take selling to take the market down under the 1.5325 support.

Change in the OI is important and a report is released daily.  We may soon be offering a daily update as the information becomes available.  Check the Forexrazor website for developments.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	24,438	17,224	2,914	4,037	1,921	1,767	18,193
	Change:	-274	55	694	-887	62	45	-1,543
	% Open Interest:		70.5	11.9	16.5	7.9	7.2	74.4
	Analysis:	There was little activity in this very small market during the period.  Large spec traders remain a 5.8 to 1 long.  The small spec, who is a little better than a 2 to 1 long did sell out some of his length.  It is hard to determine if this reflects collective market judgement or merely liquidation of the expiring Sept contract.
EUR	Contracts:	296,139	54,305	75,989	58,613	64,489	157,820	130,360
	Change:	-10,356	4,063	4,154	6,171	7,285	-1,930	-3,135
	% Open Interest:		18.3	25.7	19.8	21.8	53.3	44.0
	Analysis:	While the OI is very large in the euro, there is certainly a lack of unanimity of opinion.  Option expiration was probably the cause of the big spread liquidation as the total spreading activity was down 18,660 contracts to 8.6% of the total OI.  Large specs remain short and added equally to both their longs and their shorts.  Small specs are like wise short, big players in this market, but have only a 2% large short of the short side in this market.  This market lacks consensus.
GBP	Contracts:	154,848	22,341	37,570	27,203	34,729	99,356	76,600
	Change:	-8,580	-1,767	819	706	3,740	-3,128	-8,748
	% Open Interest:		14.4	23.3	17.6	22.4	64.2	49.5
	Analysis:	Although the open interest declined during the period, speculators continued to add to their short positions.  The selling was not of sufficient size to take the pound significantly lower, though the pound selling did increase the specs dollar long.  If the spec selling continues, it would not be surprising to see some pressure on the pound.  We will need to watch for a break out from the current congested area.
JPY	Contracts:	161,314	66,038	13,995	29,390	33,669	60,724	108,489
	Change:	1,973	4,856	2,299	-1,341	-2,979	3,802	7,998
	% Open Interest:		40.9	8.7	18.2	20.9	37.6	67.3
	Analysis:	Large specs remain an unbalanced long by a 4.7 to 1 margin, as they are apparently convinced the Japanese government will remain impotent in dealing with the strong yen.  The large trader continued to add to their positions.  Small traders have been modest shorts and liquidated some of that position.
CHF	Contracts:	77,214	25,284	9,199	20,898	9,999	30,389	57,372
	Change:	10,309	4,547	1,051	1,350	-1,006	6,228	12,081
	% Open Interest:		32.7	11.9	27.1	13.0	39.4	74.3
	Analysis:	At a time when the OI should be going down with the Sept contract liquidation, there was a sharp increase in the SF.  Flight from the euro and the USD has made specs big holders of the franc with the OI climbing to records.  Large specs are approaching the 3 to 1 long ratio, and the little guy is a 2 to 1 long.  The majority is never right for very long when the money flow stops elevating the market by extending the longs.
CAD	Contracts:	118,500	28,331	27,535	37,946	19,229	47,737	67,250
	Change:	-8,604	-1,735	-3,318	-4,322	-2,935	-226	-31
	% Open Interest:		23.8	23.2	32.0	16.2	40.3	56.8
	Analysis:	Once again the large spec position again flipped, back to the long side of the C$, but the position is very evenly balanced.  As we approach the end of trading in the Sept contract, would look for the open interest to contract further as some of these trades seems to offset hedging activity.  Small specs did reduce positions but remain a 2 to 1 long.
NZD	Contracts:	27,922	14,648	5,271	2,735	1,197	9,876	20,791
	Change:	7,823	2,455	35	-215	-988	4,920	8,113
	% Open Interest:		52.5	18.9	9.8	4.3	35.4	74.5
	Analysis:	There was a 28% increase in the OI during the period, and most of the position increases were for the account of commercials.  With contract expiration rapidly approaching in the Sept contract, this increased commercial activity may well be pricing versus cash contracts or off market trades and swaps.  The market did rally smartly during the period which indicate the commercials were probably short, but this is not necessarily indicative there will be follow through.
AUD	Contracts:	133,420	69,723	12,808	27,065	14,310	31,651	101,321
	Change:	23,123	15,231	2,462	1,356	-3,104	6,707	23,936
	% Open Interest:		52.3	9.6	20.3	10.7	23.7	75.9
	Analysis:	Like the kiwi, there was a big up in the OI.  Large specs were the buyers and the commercials were primarily the sellers.  The large specs are now a 5.4 to 1 long while the small spec is a 2 to 1 long.  The buying in the A$ helped run the market back to the highest level since early May.  Will the buying continue next week?

*Source: CFTC (Commitments of Traders with Delta-adjusted Options and Futures Combined) Actual Report

Commitment of Trader (COT) Report: Every Friday the CFTC releases data about futures/options trading activity by market segment in various markets including currencies.  Positions for each currency are classified into 3 groups: large speculators, small speculators, and commercial traders.  If interpreted correctly this data can be useful in forecasting price trends in the spot forex market.  The table below contains a condensed version of currency trader?s collective market votes.  Interpretation of this data is definitely an art rather than a science.  With that caveat, you may view the latest COT analysis for each currency in the analysis fields of the table below.  *See below for definitions and additional information about the COT Report and analysis.

The CFTC breaks open futures contracts into reportable positions and non reportable positions.  Reportable positions are further broken down into commercial and non-commercial positions.  Though commercial reportable positions may be a very large portion of the open interest, the commercials activity in the futures market is an adjunct to other business activity.  There may indeed be speculating in some cases, but they may also be responding to many factors such as manufacturing, purchase and sales of products, or investment overseas, or repatriation of capital or profits from abroad.  Or they may be banks hedging their overseas loans or currency positions.  As hedgers they may be more concerned with futures as an insurance policy than a profit center.

While price movement is not the major concern of the commercial user, it is the lifeblood of the large and small trader.  It is for that reason that we analyze the activities of the speculators in detail and ignore the commercials positions.

Reportable positions are usually held by the wealthy experienced successful traders and or a combine of participants.  That does not mean that their every trade is a winner. However to hold a reportable currency position is not for the faint of heart and requires a well funded account and probably a friendly banker.  Non reportable positions are those of the smaller trader.  Conventional wisdom says the little guy is generally on the losing side of the market.  Naturally there are exceptions to all rules, but both groups are responsive to price action.

How to use COT Report:  There are 3 main ways the COT report is used to forecast price trends in the spot forex market.

1)  Extreme Positions:  If everyone is already long or short it is a strong indication price may reverse because there is no one left for buyers to buy from and no one left for sellers to sell to.

2)  Changes in Market Positions: When large speculators change their position and go from net long to net short or vice versa, there typically is a good reason they do this.

3)  Changes in Open Interest: Rising or falling open interest may reflect directional commitment or lack thereof and therefore indicate strength or potential reversal of a particular price trend.

Terminology & Types of Traders:

a)  Non-Commercial Reportable Traders: (Large Traders) Large speculators, also referred to as large spec, whose position size requires reporting to the CFTC

b)  Nonreportable Traders: (Small Traders) Typically smaller speculators, also referred to as small spec, whose position size does not require reporting to the CFTC.

c)  Commercial Reportable Traders: (Commercial Traders) Traders engaged in business activities hedged by the use of the futures or option markets.

d)  Open Interest (OI):  Open interest, also referred to as OI for short, is a trade, long or short, that has not yet been offset or closed out.  For every long, there is a short.  Every buyer must find the price at which a seller will sell.  Day traders who get in and out on the same day do not add to the OI.

e)  Net Short and Net Long: In the case of Net Long, a particular market segment (i.e. large speculators) has more long positions with open interest than short positions.  The opposite applies to Net Short.

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