COT Report Data 12 07 2010

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Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: For the second week in a row, the total open interest (OI) changes have been marked by immense trading in the euro.  Last week the euro OI was up 38,458 contracts, and this week the euro OI was down 56,015 contracts.  Granted, expiration of the euro options accounted for about half of the reduction, but there is still a lot of positions going on and being taken off.  Total OI was up 58,100 contracts with the only other major change in the C$, up 10,099.

The total gross speculator position short the USD was reduced during the period from 148,620 to 121,930 contracts.  Speculators are now short the pound, the euro, and long the DI, a total of 50,268 contracts.  The biggest change came in the euro where both the large and small specs liquidated their longs.  Small specs aggressively flipped to a net short in the euro.  Speculators remain very big longs in the A$, 60,824 contracts, the C$, 57,755, and more modest longs in the NZ$, the Yen, and the SF.

Small specs have their biggest percentage share of the long side of the SF, 35.5%, the C$ 34.7%, and the A$, 24.3%.  On the short side they have their biggest bets in the euro, 25.2%, the yen, 24.6% and the pound 23.8%

Large specs have their biggest market share in the NZ$, 79.8%, the DI, 56.5%, the A$ 40.8% and the C$ 39.0%.  The large traders are most active on the short side of the DI, 29.9%, and the pound 28.5%.

It will be interesting to see what changes happen next week after the Dec contract expires.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	35,407	20,005	10,587	5,721	3,158	7,588	19,568
	Change:	-115	333	1,197	396	103	-794	-1,365
	% Open Interest:		56.5	29.9	16.2	8.9	21.4	55.3
	Analysis:	There was not a lot of movement in the DI positions.  Both the large and the small specs remained long the USD.  The large spec reduced his position but still remains a 1.9 to 1 long.
EUR	Contracts:	236,446	33,245	47,594	51,050	59,643	124,248	101,306
	Change:	-56,015	-17,208	-8,112	-17,077	-1,571	7,315	-17,287
	% Open Interest:		14.1	20.1	21.6	25.2	52.5	42.8
	Analysis:	There was a sharp down in the OI, and a large part was spreading were the OI was reduced by 29,044.  This is a normal occurrence as contracts in options expired.  The spreading OI is now down to 11.8% of the OI.  Small specs are big participants in the euro futures market with total market shares exceeding those of the large specs. There were big position shifts during the period.  The large spec was a liquidator of over 17,000 contracts of there longs as well as 8100 contracts of shorts.  Small specs were also heavy sellers of their longs and flipped their position to the short side.  Commercials also flipped their position, as they moved to the long side of the euro.  Since the end of this period, the market action has favored the shorts.
GBP	Contracts:	92,595	14,132	26,398	18,936	22,016	54,154	38,808
	Change:	-6,127	-12,357	-1,056	-1,636	-539	9,756	-2,641
	% Open Interest:		15.3	28.5	20.5	23.8	58.5	41.9
	Analysis:	Last week all three groups flipped their positions.  This week the large spec reduced longs  thereby increasing his net short.  Small specs, like the large ones reduced longs to increase their net shorts.  Specs are now collectively short over 15,000 contracts of the pound.  There appeared to be some small short covering late this past week after the end of the COT period.
JPY	Contracts:	141,987	48,032	24,681	29,956	34,887	58,888	77,308
	Change:	-6,934	-8,252	-267	2,377	870	2,484	-3,994
	% Open Interest:		33.8	17.4	21.1	24.6	41.5	54.4
	Analysis:	As we approach the expiration of the Dec contracts, there should be some liquidation in the futures contracts.  There was modest reduction in the yen as the large specs sold out long positions.  They are now down to a little less than a 2 to 1 ratio long.  Small specs remain short the yen but were buyers during the week.
CHF	Contracts:	44,633	18,016	8,620	15,412	9,619	10,500	25,690
	Change:	-2,175	1,663	464	-976	-834	-2,069	-1,012
	% Open Interest:		40.4	19.3	34.5	21.6	23.5	57.6
	Analysis:	There was small liquidation as the small specs and the commercials reduced positions modestly.  Large specs remain better than a 2 to 1 long and made small additions to their positions.   The SF remains a favorite for those that fear the future value of the euro.
CAD	Contracts:	120,631	47,056	13,431	41,851	17,719	30,202	87,957
	Change:	10,099	15,276	2,783	-34	-616	-2,026	11,049
	% Open Interest:		39.0	11.1	34.7	14.7	25.0	72.9
	Analysis:	The OI increased by over 10,000 contracts as the large spec bought 15,276 contracts of new longs.  This leaves the large spec long about 3.5 to 1.  Commercials were on the sell side of the C$.  It is not unusual to find big spec activity in the loonie as the expiration of a contract looms.  It is my conjecture that when the open interest remains after the end of trading this probably means that it is a part of some commercial pricing or the use of futures prices to fix export or import contracts.  The small spec remains a 2.3 to 1 long, and is long 34.7% of the total market.  Specs increased their long in the C$, from 44,681 contracts, to 57,755 contracts.
NZD	Contracts:	27,595	22,024	3,763	3,220	1,472	2,185	22,194
	Change:	20	-958	-774	-72	236	884	392
	% Open Interest:		79.8	13.6	11.7	5.3	7.9	80.4
	Analysis:	There was little change in this small market during the period.  Large specs are long the gibbest share of the market and liquidated a small amount.  The commercials, who are short wer on the other side of the trade.  There are fourteen large specs long 79.8% of the market.
AUD	Contracts:	132,701	54,107	10,407	32,303	15,178	43,958	104,782
	Change:	3,032	8,648	-6,876	-1,766	-4,318	-1,091	16,986
	% Open Interest:		40.8	7.8	24.3	11.4	33.1	79
	Analysis:	The A$ remains the speculators favorite.  The large spec increased their longs and decreased their shorts by over 15,000 contracts, and they are now better than a 5 to 1 long.  Total spec longs in the A$ increased to over 60,000 contracts, from about 43,000 contracts.  It will be interesting to note if this position is reduced when the Dec contract expires.

*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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