COT Report Data 11 09 2010

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Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: My apologies for the tardy presentation of this week's report.  Last week's government holiday delayed the data release until Monday, and some computer difficulties caused delays in preparation.

The open interest (OI) during the period decreased by 6,236 contracts.  There was sizable liquidation in the euro, down 25,561 contracts, and the yen was reduced by 6,585 contracts.  Offsetting these declines were increases in the C$, 18,861 contracts, the pound, up 3,245 and the NZ$ up 3,141 contracts.

The only spec long position was in the DI, and only 6,369 contracts.  Specs were short the USD versus all other currencies.  There was a modest reduction of the long euro position by 6,747 contracts, and the yen by 13,011 contracts but the short USD position versus the C$ was up 16,168 contracts, and 13,587 in the pound.  The total short USD and long something else increased in the period to 268,712 contracts.  The huge USD short positions, especially in the commodity currencies may be at risk for a squeeze.

The small specs flipped their position in the DI from short to long and small specs also flipped from a long to a short in the yen.

The small specs biggest long positions were in the C$ 33.3%, the SF, 32.9% and the pound 29.1%.  Their biggest short percentages of the total market were in the yen 26.2%, and the euro and the SF, both at 20.1%.

Large specs continue to dominate the DI market, long 66.8% and short 50.5%.  The biggest large long is in the NZ$, 85.6%followed by the SF 46.4% and the A$, 44.5%.  On the short side of the markets, the large specs did not have any real big commitment.  They were short 22.8% of the SF, and 19.5% of the pound.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	39,192	26,188	19,806	4,297	4,315	7,585	13,949
	Change:	-1,655	-1,771	-145	-410	837	373	-2,500
	% Open Interest:		66.8	50.5	11.0	11.0	19.4	35.6
	Analysis:	The large and small specs had different approaches to the DI market.  During this period when the USD was strengthening thee large spec was reducing his long modestly.  The small spec wanted no part of the rally and flipped his position to a very nominal short.  Large specs remain the biggest players in this small market.
EUR	Contracts:	259,664	61,314	37,913	65,632	52,140	92,594	129,487
	Change:	-25,561	-4,062	8,415	632	-5,099	-4,655	-11,402
	% Open Interest:		23.6	14.6	25.3	20.1	35.7	49.9
	Analysis:	This was a period of weakness for the euro, especially versus the USD, and a period when the large specs were doing the right thing, namely reducing their longs and increasing their shorts.  At period's end, however they remained good size longs.  Small specs added modestly to their longs cand covered shorts, though they too remain long.  The OI was down, as spreading was down 17,475 of the 25,561 reduction in the OI.  This no doubt represented option expiration.  Spreading now represents 15.5% of the total futures and option OI.  Daily futures volume remain very big, and long liquidation has probably been cause for recent weakness.
GBP	Contracts:	105,517	42,185	20,568	30,727	21,041	28,192	59,495
	Change:	3,245	2,478	-4,402	4,673	-2,035	-3.190	10,398
	% Open Interest:		40.0	19.5	29.1	19.9	26.7	56.4
	Analysis:	The specs reduced their euro position in the period by 6,747 contracts, but they really took a licking to the pound.  Large and small specs were on the same page, both adding to sterling longs and reducing their shorts.  The total additional spec longs amounted to 13,587 contracts.  Large longs are now 2 to 1 longs in the pound.  It would appear that many of these new longs were established above the 1.60 level.  It will be interesting to watch the market's if the market sells below 1.60.
JPY	Contracts:	151,974	54,588	18,171	36,169	39,861	56,196	88,922
	Change:	-6,585	-7,819	-123	3,878	9,193	1,649	-11,362
	% Open Interest:		35.9	12.0	23.8	26.2	37.0	58.5
	Analysis:	Large and small specs were trading in different directions during the period.  The large spec reduced his out of balance long by 7,819 contracts, but remained a 3 to 1 long.  The small spec flipped his position from a long to a short.  The bottom line is that specs reduced their collective long in the yen by over 13,000 contracts.  Of the total decline in the OI of 6,585, spreading(options) accounted for 4,293 contracts.
CHF	Contracts:	53,944	25,012	12,274	17,776	10,827	10,245	29,922
	Change:	1,924	1,894	1,082	-1,435	-368	2,006	1,751
	% Open Interest:		46.4	22.8	32.9	20.1	19.0	55.5
	Analysis:	The SF remains a perceived safe haven by the specs who are afraid of the euro debt issues.  Large specs are long 46.4% of the market and a little better than a 2 to 1 ratio long.  Small specs likewise are longs in the Swissy.
CAD	Contracts:	138,810	62,309	25,212	46,218	20,291	26,801	89,829
	Change:	18,861	21,150	5,812	2,163	1,333	-1,908	14,260
	% Open Interest:		44.9	18.2	33.3	14.6	19.3	64.7
	Analysis:	The large spec was extremely active buying over 21,000 contracts during the time when the loonie was testing the parity level with the USD.  Large specs were a 2.46 to 1 long after their buying spree.  Small specs, already good longs added small lots to their position.  Specs increased their C$ spec longs by 16,168 contracts during the period.  Failure to follow through above parity combined with a pause in the commodity buying makes this currency vulnerable to a sell off.
NZD	Contracts:	31,494	26,965	4,715	3,538	848	991	25,931
	Change:	3,141	3,572	470	-66	-354	-365	3,024
	% Open Interest:		85.6	15.0	11.2	2.7	3.1	82.3
	Analysis:	The large spec continued to expand his position long the kiwi.  There are now 16 large traders who are long 85.6% of the OI.  Small specs are better than 4 to 1 longs in the NZ$ but their position size is small.
AUD	Contracts:	140,520	62,472	15,398	38,325	18,882	35,292	101,810
	Change:	364	-3,182	-512	3,887	-648	1,970	3,835
	% Open Interest:		44.5	11.0	27.3	13.4	25.1	72.5
	Analysis:	Both spec groups are vigorous supporters of the long side of the A$, net long 66,517 contracts between them.  Large specs are a 4 to 1 long and the little guys are 2 to 1 long.  On the sojourn above parity with the USD the small spec continued to add contracts, but the large spec was a seller.  The A$ has sold off to support in the .9740 level today, but the A$ remains vulnerable to lower commodities prices and a potential Chinese slowdown.

*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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