Commitment of Trader Report & Analysis

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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

Data and Analysis for Most Recent Release (July 6 2009): Are we close to a short covering rally in the dollar?  Total open interest for the dollar index and the seven currency futures increased by only 19,922 contracts during the reporting period.  However, net commercial long positions during the period, increased by 23,565 contracts to a total of 144, 226 net long contracts.  This means the specs, big and little, are on the other side, short side of the USD in a big way.  The OI grew the most during the period in the AUD, the CAD, and the British pound.  Some high waves here may rearrange more than just the deck chairs on this voyage.

Legend:	Net Long	Net Short	Changed Net Position

Overview:

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	21,624	4,356	11,172	2,247	3,854	12,082	3,658
	Change:	-516	-241	-1,093	-60	81	-253	458
	% Open Interest:		20.1%	51.7%	10.4%	17.8%	55.9%	16.9%
	Analysis:	There was not a lot of movement this past week.   Large traders remain almost 2.6 to 1 short the dollar and the big commercials are long 3.3 to 1.  With a set up of big spec short and big commercial long who will liquidate first?  The small spec has little involvement in this market.
EUR	Contracts:	136 583	46,965	29,471	43,622	36,222	31,594	56,488
	Change:	-4,995	-484	143	-3,110	-2,067	-827	-2,500
	% Open Interest:		34.4%	21.6%	31.9%	26.5%	23.1%	41.4%
	Analysis:	Large specs are long the euro but reduced position by a minor amount during the period.  The commercial  remains short but covered a small portion of the short.  The small specs are big players in this market, and reduced both long and short positions but remain long the euro.  This was a fairly volatile week, but the open interest declined as people took money out of the market.
GBP	Contracts:	104,306	30,980	34,120	24,009	21,495	41,742	41,116
	Change:	8,540	6,855	-949	9	-1,470	1,283	10,566
	% Open Interest:		29.7%	32.7%	23.0%	26.0%	40.0%	39.4%
	Analysis:	Though the large spec remains short but reduced his position substantially during the period.   The commercial was very active putting on over 10,000 new shorts in the period. The small spec is now a modest long off setting the large spec who remains a small long.
JPY	Contracts:	81,807	22,713	24,202	18,260	16,589	35,274	35,457
	Change:	-1,101	1,074	-1,581	-3,226	-2,410	1,308	3,147
	% Open Interest:		27.8%	29.6%	22.3%	20.3%	43.1%	43.3%
	Analysis:	The commercial was the modest seller, and flipped to a short position. Small specs reduced both their long and short positions and remain a modest long.  All groups are fairly evenly balanced, so there are no strong views on the yen.
CHF	Contracts:	37,662	16,558	6,090	14,363	8,934	4,170	20,066
	Change:	-6,160	-5,465	-1,865	-1,993	1,356	642	-6,307
	% Open Interest:		44.0%	16.2%	38.1%	23.7%	1.11%	53.3%
	Analysis:	Commercials reduced their short but remained a 4.8 to 1 short.  It looks like the commercial was alerted prior to the Swiss National Bank interventions when he increased his short positions followed by the sale of 6307 contracts after the intervention. There are 11 large specs long 44% of the OI.  The small spec remains long, like the large spec but both groups reduced their long after the devaluation.
CAD	Contracts:	98,803	33,044	22,463	34,140	17,253	21,149	48,617
	Change:	9,184	2,612	4,880	452	1,770	5,267	1,681
	% Open Interest:		33.4	22.7%	34.6%	17.5%	21.4%	49.2%
	Analysis:	Small specs remain 2.1 to 1 long on the CADUSD while the commercials are almost a 2.3 to 1 short.  Both spec groups reduced their long in a period that went against them.  Further spec long liquidation has probably taken place since the period ended.   Commercials were good buyers during the period.
NZD	Contracts:	23,742	18,679	996	2,177	1,227	2,886	21,519
	Change:	1,136	702	-25	102	436	332	725
	% Open Interest:		78.7%	4.2%	9.2%	5.2%	12.2%	90.6%
	Analysis:	Large spec remain a huge 18.7 to 1 ratio long, while commercials are short  90.6% of the market.  This small futures market is dominated by some very big players on both sides.  There are 13 very big spec longs and 10 big commercial shorts.  Changes in the open interest are not big but reflect more of the same, with large spec buying and commercial selling.  The groups are entrenched with more going on here than meets the eye.
AUD	Contracts:	97,694	46,508	10,312	23,192	10,007	24,468	73,849
	Change:	13,834	6.601	996	834	-378	6,510	13,327
	% Open Interest:		47.6%	10.6%	23.7%	10.2%	25.0%	75.6%
	Analysis:	Large specs are 4.5 to 1 long and added to the positions.  There are 24 in the reporting group of large specs.  The small specs added some of their commitment to the long side and are now  2.3 to 1 long.  Commercials did show up on the buy side in numbers this period but were out numbered by the commercial sellers 2 to 1.  It looks like we have some macro economic concept traders here with some big bets.

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

What is the COT (Commitment of Trader) Report: Every Friday the CFTC releases data about futures/options trading activity by market segment in various markets including currencies.  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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