Bankers Chatter About Potential Rate Increases, Drives the Forex Market

This morning it was reported that the Euro CPI y/y was up 2.3% above the 2% target.  The core rate increase was a subdued 1.1% y/y, a nice number but not nearly as important as the higher CPI.  Yes, the 2.3% increase was a clarion call for the European Bankers to suit up into their battle gear, and get ready to fight inflation.  Never mind that food and oil price increases, something beyond the control of the bankers was the cause, these pugnacious bankers were getting ready for battle.

This attitude combined with pending Bernanke testimony, first the US Senate, and then the House gave the euro energy to assault the previous high above the 1.3850 area.  For Fed Chairman Bernanke, only the core inflation rate is important, and he considers job creation is one of his mandates.  With a plethora of US job reports coming later this week, this is bound to keep the market moving.  

The Non Farm Payroll report often gives us an off the wall surprise, and the recent sharp reduction in US employment rates has been a surprise.  The unemployment rates have decreased only because the size of the US work force has diminished.  How much longer will this continue?

The US unemployment problem is one that extends well beyond mandates to the Fed.  In a Financial Times FT.com article 3M chief warns Obama over business regulation they reported:

"

The head of one of the US’s biggest industrial groups has launched a scathing attack on Barack Obama’s attempts to repair relations with companies, dubbing him “anti-business”.

Manufacturers could shift production out of the US to Canada or Mexico as a result, warned George Buckley, chief executive and chairman of 3M...........(continuing)

Mr Buckley, who has run the diversified manufacturer since 2005, said: “There is a sense among companies that this is a difficult place to do business. It is about regulation, taxation, seemingly anti-business policies in Washington, attitudes towards science.”

He added: “Politicians forget that business has choice. We’re not indentured servants and we will do business where it’s good and friendly. If it’s hostile, incrementally, things will slip away. We’ve got a real choice between manufacturing in Canada and Mexico – which tend to be pro-business – or America.”

We doubt that the Fed Chairman will comment on these issues Tuesday and Wednesday but the attitude that the current administration is hostile to US business is a problem.  Later in the week there will be Euro fundamental reports Thursday leading up to an ECB Press Conference at 8:30am NY Time.  This will then be followed by the NFP report on Friday.

We have lots of numbers to digest and trade.  The euro is loaded with spec longs, but they have the money, and the market acts like it wants to work higher.  We are inclined to scalp the long side of the euro on weakness in the 1.3725 area.  If able to enter at that level, the risk is probably not more than 50 pips.  Should the market be able to spend some time above the 1.38+ level, a return to 1.40 looks like a possibility.

by Ralph Shell @ 3:27 PM, Feb 28   Comments(0)  Rate This Post  Rating:

COT Report Data 02 22 2011

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Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: There was a small net increase in the open interest (OI) during the period.  The biggest increase in the OI was in the euro, 17,805 contracts, but there was also a 7k increase in the yen and a 3+k increase in both the SF and the A$. There was almost an 8k decrease in the pound OI where the large spec was liquidating.  The total net OI increase was 23,763.

Combined speculator positions remains a big USD short, although it was reduced from the previous week.  The net short spec USD position was reduced to 265,722 contracts, down from 302,067 in the previous week.  Specs are long something else and short the USD in all contracts except the yen.  In the yen they increased their short yen and long USD position to 41,479 contracts.  The biggest long reduction by specs was in the pound, down about 19k contracts. 

There were no position flips during the week.

Small specs had the biggest long positions in the SF, 41.2%, the C$, 35.5%, and the A$, 26.9%.  On the short side of the market, the small specs has the largest percentage share in the SF, 29.9%, the yen 26.9%, and the euro 22.2%

The large specs continued to have the biggest positions in the two smallest markets, the DI, and the NZ$.  They were long 62.7% of the DI and short 77.2%.  In the NZ$ they were long 57.4, and short 28.3% of the market.  The biggest other long positions as a percentage of the total market is in the A$, 54.8%, the C$, 48.9%, the SF, 39.0%, and the pound 38.5%.  Only in the yen do the big specs have a large short position, 37.9% of the market.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	40,668	25,505	31,399	5,992	3,678	8,261	4,681
	Change:	259	1,121	1,285	308	153	-391	-401
	% Open Interest:		62.7	77.2	14.7	9.0	20.3	11.5
	Analysis:	There was little changes in the composition of this market during the period.  Large traders dominate this market, and kept their short position in the DI during the week.  Interesting to note that the small specs are long and the big specs short.
EUR	Contracts:	258,437	75,880	26,294	62,620	57,496	80,642	125,352
	Change:	17,805	13,844	1,655	249	2,999	1,817	11,256
	% Open Interest:		29.4	10.2	24.2	22.2	31.2	52.4
	Analysis:	There was a modest increase in the OI during the period caused primarily by the large specs going long and the commercial going short.  Large specs are now close to a 3 to 1 long in the euro.  Small specs have only a nominal euro long.  Spreading increased by 1,895 contracts to 15.2% of the total indicating the options players remain quite active..
GBP	Contracts:	135,110	52,066	16,638	33,579	23,119	42,374	88,262
	Change:	-7,880	-16,530	-765	-2,394	528	9,257	-9,429
	% Open Interest:		38.5	12.3	24.9	17.1	31.4	65.3
	Analysis:	The large specs reduced their long position by over 16k contracts but still remain a 3 to 1 long in the pound.  Small specs cut long position modestly.  Commercials added to their longs and covered some of their shorts.  Spreading increased by 1,785 contracts to 5.2% of the total OI.
JPY	Contracts:	137,102	23,595	52,027	23,872	36,919	82,640	41,161
	Change:	7,005	-1,408	8,102	460	-1,513	7,759	222
	% Open Interest:		17.2	37.9	17.4	26.9	60.3	30.0
	Analysis:	Despite all the chatter about the yen remaining the safe-haven currency destination, the big spec continued to short the yen, increasing his position by a net of over 9k contracts.  Large specs are now short the yen by better than a 2 to 1 ratio.  Small specs, also short the yen, made a small reduction in their position.
CHF	Contracts:	47,875	18,668	5,467	19,739	14,300	7,953	26,593
	Change:	3,374	937	-1,236	1,225	2,399	289	1,288
	% Open Interest:		39.0	11.4	41.2	29.9	16.6	55.5
	Analysis:	There was a small increase in the OI during the period, caused primarily by an increase in small spec activity.  Both spec groups remain committed to the long side of the SF.  The large spec is a 3.4 to 1 long.  The small spec is long over 41% of the total OI.
CAD	Contracts:	147,837	72,225	4,371	52,523	19,320	20,496	121,554
	Change:	-183	-4,335	-469	3,737	548	329	-348
	% Open Interest:		48.9	5.0	35.5	13.1	13.9	82.2
	Analysis:	The large specs are almost a 10 to 1 long in the C$, only marginally reducing positions during the week.  Small specs increased their long and are a 2.7 to 1 long.  Together the specs are net long over 100k contracts, and the OI went up after the end of the reporting period.  The C$ is the most favored spec long.
NZD	Contracts:	27,830	15,975	7,874	3,247	1,544	8,466	18,270
	Change:	95	-2,043	-334	100	406	1,896	-119
	% Open Interest:		57.4	28.3	11.7	5.5	30.4	65.6
	Analysis:	The large specs reduced their longs in this small market while the commercials went the other way.  Small specs are not big players in this market but are a 2 to 1 long.
AUD	Contracts:	132,596	72,624	6,931	35,628	17,799	20,507	104,028
	Change:	3,288	1,876	1,072	212	1,996	641	-349
	% Open Interest:		54.8	5.2	26.9	13.4	15.5	78.5
	Analysis:	The OI was up a minor amount but there were few changes in positions.  The large specs remain a very large long, a ratio of over 10 to 1.   Smaller specs are also long, but only by a 2 to 1 ratio.  It appears the OI has grown since the end of the report.

*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.

Click here for previous COT Analysis Postings  |  Click here for CFTC page about the COT Report

by Ralph Shell @ 11:18 AM, Feb 26   Comments(0)  Rate This Post  Rating:

USD Flounders as Currency Speculators Assess Developments

The turbulence spreading through out Africa and the Mid- East illustrates the vulnerability of the developed world which relies on that area for so much of it's energy.  Theoretically the US recognized this threat when, in 1977, they made the Department of Energy, a cabinet position with the accompanying bureaucracy; their objective, making the US more energy independent.  Unfortunately this is one more Washington agency that has lost its way, as it obstructs the development of US energy.  Rather than becoming more independent, we are less, and find it necessary to spend $20B or more per month from countries that do not like us. 

Off shore production in the Gulf of Mexico, so successful for many years, producing 2M barrels/day is now off limits to future development.  Florida, currently suffering with 12% unemployment and big state deficits, is thought to have massive oil and gas fields off of the West Coast, but the politicians and DOE have refused to open this area to exploratory drilling.  There are massive known reserves in Alaska  but no drilling there for fear of harm to the pristine wilderness.  No development of oil shale on federal land in the West, thanks to a provision stealthily inserted one night by then Senator Ken Salazar, and now Sec. of the Interior.  Now Salazar, the DOE and the EPA are are studying to see if the successful horizontal drilling techniques employed in the Williston basin are harmful to the environment.   Yes, and the near bankrupt state of California, has off shore oil fields but forget about developing there.  What price per gallon $7, 8 or 10 will it take to stop the nonsense? 

Currency traders contend that the USD is no longer the a safe haven, and considering some of the short sided US energy policies and the fiscal irresponsibility in Washington there is some merit to that argument.  The SF and the yen have been mentioned as popular places to park some hot money.  This week the open interest, futures only at the CME, in the SF has gone about 10%, almost 4k yesterday.  Trading at .9255 versus the USD, this is a multi year low of the USD versus the CHF.  Speculators have been sizable longs in the franc versus the USD.

The situation in the yen is confusing.  In the latest COT report the large spec had made a massive flip to the short side of the yen, swapping positions with the commercial who went long.  The small spec had already been short the yen, and added to that position.  This week, with the yen anointed as a most favored safe haven destination, this has put the yen spec shorts on the defensive. The USD's high of 83.51 has versus the yen has given way to a sell off down to 81.61.  Specs caught short the yen chose to liquidate yesterday, with the OI going down 5.6k contracts yesterday.  The market acts like there is further liquidation today.

The most popular currency trade, according to how the specs are voting in the futures market, is short the USD.  The yen had been the exception. Should the yen continue to strengthen as specs bail, we are going to be a buyer on a sell off to the 81 area.  Use appropriate money manage stops and lets see if these markets get some new drivers next week.

by Ralph Shell @ 1:17 PM, Feb 24   Comments(0)  Rate This Post  Rating: