Weekly COT Report Data 12 21 2010

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Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: The ending date for this report is prior to the holiday shortened trade. During the period the open interest (OI) declined by 17,893 contracts.  The big feature was the tardy liquidation of the remnants of the C$ Dec futures contract.  Excluding this 48,821 reduction, and the OI would have been higher.  The euro was the contract with the biggest increase in the OI, 22,195 contracts.

Specs favor a DI long dollar, and a short euro and pound position, which by default leaves them long the USD.  Specs are short the USD and long the yen, SF, C$, NZ$, and the A$.  The total USD net short has been reduced during the period to 133,713 contracts.  This is down from 137,425 contracts in the previous week.  Again, the biggest positions remain in the commodity currencies, the A$ first and the C$ second.

There was only one group that flipped position during the week.  The small spec came off the long side in the euro, and took a tiny short position.  It would not be surprising to see specs try to add to their big positions to enhance year end values.

Small specs have the biggest long share of the market in the C$, 41.6%, the SF, 36.7%, and the A$, 26.2%.  Their biggest shorts are in the yen, 30.5% and the pound, 28.4%.  They have 25.6% stakes of both the long and short side of the euro.

Large specs again have the biggest share of the two smallest markets, the DI and the NZ$.  Since they also have big short positions,  their positions may not be that important.  Otherwise the biggest long positions are in the A$, 57.2%, the SF 53.9%, and the C$ 40.7%.  Their biggest short positions are in the pound 27.5%, the SF, 26.2%, and the euro 24.1%.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	27,469	15,864	11,469	5,068	2,238	5,767	12,993
	Change:	1,902	-447	288	1,302	-26	1,327	1,920
	% Open Interest:		57.8	41.8	18.5	8.1	21.0	47.3
	Analysis:	There was a small increase in the OI during the period, with the small specs getting involved.  Traditionally they have not been bog participants in the DI, but they did buy 1,302 contracts during the period.  They are now a 2.28 ratio long.  Large specs reduced some of their longs and were small sellers.
EUR	Contracts:	209,591	38,658	50,521	53,584	53,633	80,062	68,151
	Change:	22,194	2,844	5,107	1,824	-2,276	7,152	8,989
	% Open Interest:		18.4	24.1	25.6	25.6	38.2	32.5
	Analysis:	There was a 10% increase on the OI,  The large spec continues to be short the euro, and made a modest addition to his position.  Small specs flipped their position to a very nominal short, but their percentage of longs to shorts is about equal.  The biggest increase in a position this week was spreading, because option traders increased positions.  Spreading trade now accounts for 17.8% of the total OI.  The total OI, excluding options was 156,136 far less that the combined OI of 209,591.  In the futures only report, the small spec remained a very small long. Opinion about the future direction of the euro is quite mixed.
GBP	Contracts:	79,100	16,311	21,731	19,011	22,436	39,378	30,533
	Change:	5,153	4,339	1,862	452	2,437	-698	-206
	% Open Interest:		20.6	27.5	24.0	28.4	49.8	38.6
	Analysis:	There was only a small increase in the OI for the period.  The large specs decreased their short position when they bought 4,339 contracts, but they still remain short.  The small specs increased their short position, and are now short 28.4% of the total OI.  The OI in the pound is not large.  Spreading represents 5.6% of the total market.
JPY	Contracts:	103,011	34,860	22,079	20,820	31,430	40,756	42,927
	Change:	-4,925	-447	-172	-1.321	-991	-4,172	-4,778
	% Open Interest:		33.8	21.4	20.2	30.5	39.6	41.7
	Analysis:	All groups reduced their longs and shorts during the period, although the OI declined only a minor amount. The OI has increased after the end of this period by more than 10,000 contracts.  The large spec continues to be long the yen while the small spec and the commercial are short, an unusual set up since most of the time the small and large spec are on the same side of the market.  Market action since the end of the period have favored the yen longs.  Spreading has grown to 6.4% of the market.
CHF	Contracts:	47,503	25,588	12,465	17,440	10,338	3,422	23,646
	Change:	5,267	4,777	2,757	555	-981	-166	3,390
	% Open Interest:		53.9	26.2	36.7	21.8	7.2	49.8
	Analysis:	Spec continue to favor the long side of the SF, as a safe haven and alternative to the euro.  Large specs increased their position and remain a 2 to 1 long, controlling 53.9% of the long side of the market.   Small specs are lined up the same way and added to their positions.
CAD	Contracts:	98,687	40,208	14,946	41,076	14,506	15,452	67,283
	Change:	-49,821	-4,539	3,384	-2,896	-733	-32,623	-42,709
	% Open Interest:		40.7	15.1	41.6	14.7	15.7	68.2
	Analysis:	Once again the C$ is the last to liquidate when a futures contract expires.  It is my conjecture this represents give ups and exchanges since the liquidation is almost all commercial activity.  The C$ continues to be a favorite of the large and small specs with both groups better than a 2.5 to 1 long.  Both size specs did cut back a minor amount of their longs during the period.
NZD	Contracts:	25,081	17,780	10,414	2,151	1,341	5,150	13,326
	Change:	571	-3,534	1,621	-60	382	4,165	-1,432
	% Open Interest:		70.9	41.5	8.6	5.3	20.5	53.1
	Analysis:	There has been a significant reduction in the long positions by the large spec who reduced his long positions by 3,534 contracts and increased his shorts by 1,621 contracts.  Twelve large specs remain long 70.9% of the OI while thirteen big guys are short 41.5% of the OI.
AUD	Contracts:	121,801	69,632	8,713	31,876	13,502	16,841	96,135
	Change:	1,766	7,419	392	1,057	834	-6,697	553
	% Open Interest:		57.2	7.2	26.2	11.1	13.8	78.9
	Analysis:	Despite a small increase in the total OI, the specs increased their long positions by over 7,000 contracts.  The large specs are now almost an 8 to 1 long, and small specs are better than a 2 to 1 long in the A$.  The A$ is very popular with futures traders with more open contracts than any currency except the euro and the Mexican peso.

*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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