Hedge Funds Favor Dollar and Shun the Pound

One of the financial papers this morning features a survey of currency preferences by hedge fund managers.  Since this survey was taken between Feb. 11 and Feb.22, the opinions seem more like recent history than hot news.  The dollar was the most favored currency by hedge fund managers, at that time, but why should this be a featured story 20 to 30 days later?  We have the echoes of past preferences making headlines today.

The latest commitment of traders report gives us data through March the 6th.  In that report the large specs traders, probably almost all funds, had cast a decisive vote against the pound.  Large specs were long 14,218 contracts, and short 85,008 contracts, for a total net short of 70,790 contracts.  Each futures contract is £62,500, not exactly chump change.  On Friday the pound had a decent rally, making it all the way back to 1.5164, and then selling off into the close to 1.5132.  The open interest of Friday went down 7500 contracts on a little short covering rally.  Monday gave us a rally that failed.  We printed 1.5193 and then sold off, closing lower.  What is interesting, however, is that the open interest soared 21.023 contracts higher on Monday, 14% of the total open interest.

It is our conjecture that yesterdays soaring open interest increase was the hedge fund adding to his hefty short position.  Recent market action has not given the pound sterling bears a reason to exit the market.  A current analysis of the changes in the open interest where funds are casting their vote with real money is more meaningful than a 20 day old survey of fund managers.

With the heavy selling yesterday, and bearish news this morning it is perplexing why the market is not weaker.  Last week's Monday purge of the market was in large part prompted by the forecast of a tight election.  This morning the Times of London said:

"Labour and the Conservatives are neck and neck in the marginal seats that will determine the outcome of the general election, raising doubts over David Cameron’s ability to win a clear overall majority, according to a special poll for The Times."

This confirms last Monday's poll result, and the economic news was not helpful.  Real estate prices in Britain did not appreciate as anticipated, and the lower currency did not improve the balance of payment deficit.  The British deficit was £8B, the most since August 2008, caused in large part by a drop in exports of £1.4B.

The pound has been a solid downtrend since the high printed at 1.6455 on Jan. 19, but we are not enthused shorting the market under 1.50.  The 14 day RSI is close to 30 and the MACD is at the very bottom of the screen.  This, combined with a market that has absorbed some heavy selling without breaking hard, and a market that has shrugged off some poor economic news, does not make us bearish.  We are going to watch, waiting to see if this market can make a move.

by Ralph Shell @ 1:46 PM, Mar 09   Comments(0)  Rate This Post  Rating:

Euro Slide Ends With Feeble Rally

Greek Prime Minister George Papandreau's travel agent has been busy.  After meeting with leaders in Germany and France, he is giving a speech in Washington today at the Brookings Institution and has a meeting scheduled with President Obama tomorrow.  Since he claims he is not begging for money to subsidize the generous compensation for the Greek bureaucrats, one might ask, what then is the purpose of the meetings.  There now appears to be European solidarity supporting the Prime Minister's reform efforts, though it is not known what will happen in the Greek's need more than moral support. 

Perhaps Papandreau has this extensive travel schedule because his austerity plans are not popular back home.  Thursday is the day for seemingly, a bi-weekly general strike, called in Athens, by those who will lose benefits and no longer receive their fourteen months of yearly pay.  Today optimism reigns, but the refinancing of €20B in maturing debt by the end of May remains a problem, and a general strike this week may change the mood of the market.

Quite possibly the Euro central bankers are learning from the Greek experience.  Market Watch reports:

"The Financial Times on Monday said senior German and French officials are planning to launch a European Monetary Fund that would have the authority and capabilities necessary to prevent a repeat of Greece's de-stabilizing debt woes. "

Last week the Greek government sold €5B 10 year notes yielding about 6.3%.  This week, the US Treasury is auctioning $21B of 10 year notes, in addition to $40B of three year notes and $13B of 30 year bonds.  The current yield of the 10 year note is 3.70%, firming up in front of the auction.  With the tremendous need to borrow by governments in most of the developed world, this poses a threat to the fragile global recovery.  The public sector's financing needs may make it more difficult for the private sector to borrow and expand business activity.  Should higher rates evolve, it would be the death knell for any hopes of a real estate recovery. 

It looks like the euro is trying to forge a bottom, moving sideways for over a month in a narrow band.  When we did print a new low on the first of the month there was no follow through.  The COT report shows the big specs remain a massive short in the euro but small spec is only minimally net short.  When the uptrend line was broken on Dec 04, the market then trended down 1500 pips.  The downtrend line now comes in at about 1.3740.  Trend lines are made to be broken, but for now this pair looks like it wants to continue in a 1.35/1.37 range.  We find no reason to expect a breakout from this range, but there may be more 1.29 bears than there are bulls voting for a 1.42/44 recovery.  We chose the sidelines in this pair awaiting events and developments.

by Ralph Shell @ 2:04 PM, Mar 08   Comments(0)  Rate This Post  

COT Report 03-02-2010 Data

To Subscribe to alerts when a new COT report is published (weekly) click here and choose "subscribe" on the weekly COT alerts field, and click to update your existing account or register a new one.

Data and Analysis for Most Recent Release

Legend:	Net Long	Net Short	Position Change

Overview: Data through 03-01, 2010  The total open interest (OI) continued to grow during the latest period, up 50,103 contracts.  The biggest increase was in the pound, up 13,096 contracts, followed by the yen, up 12,646 contracts.  The total speculator positions long the dollar and short something else narrowed this past week to 32,562 contracts from 93,416 contracts in the previous period.  The biggest shift against the dollar by the specs was in the yen as the specs increased their long yen position by 25,548 contracts.  The chances are the late week rally in the dollar versus the yen chased some of these new specs out.  The other increase in the short USD was in the A$ where specs aggressively bought.  The only position that flipped this week was in the yen where the commercials made a vigorous move to the short side of the yen.  The small specs largest long positions was in the C$ at 34.4% followed by the SF at 25%, and the A$ at 24.8%.  The largest spec short positions were in the SF 31.6% followed by the pound at 22.3%.  The large spec continues to dominate the long side of the DI, 73.2% and the NZD at 68%.  Large specs are gradually increasing their short position in the NZD which is now up to 42.7%.  The largest big spec short position remains in the pound, at 54.8%.

			(1) Large Traders		(2) Small Traders		(3) Commercial
		Total OI	Long	Short	Long	Short	Long	Short
USD Index	Contracts:	58,416	42,755	4,679	5,328	2,125	6,829	48,108
	Change:	-2,039	-706	-306	-423	-442	-889	-1,269
	% Open Interest:		73.2	8.0	9.1	3.6	11.7	82.4
	Analysis:	It is interesting to note that all groups reduced both their long and short positions which indicates that conviction about the future direction of the DI is waning.  The large traders remain long by over a 9 to 1 ratio.  Smaller traders, not big players here are also long by over a 2 to 1 ratio.
EUR	Contracts:	282,455	36,380	98,006	52,174	56,074	144,156	78,630
	Change:	9,369	2,397	-2,111	6,392	3,401	545	8,045
	% Open Interest:		12.9	34.7	18.5	19.9	51.0	27.8
	Analysis:	The OI continues to climb in the Euro with the small specs getting more involved, although they exhibit a mixed opinion about the euro.  Large specs are over a 2 to 1 short in the euro, but reduced this position in the last report.  There was a modest reduction in the net spec short in this period.
GBP	Contracts:	155,078	14,218	85,008	25,719	34,559	100,941	21,316
	Change:	13,096	-594	4,930	6,768	-1,316	593	3,154
	% Open Interest:		9.2	54.8	16.6	22.3	65.1	13.7
	Analysis:	The large spec is short by almost a 6 to 1 ratio, and increased his short during the period.  Likewise the small spec is also short but bought over 6700 contracts and reduced his short.  The OI is the pound has climbed sharply making the pound the second most active currencies among those reviewed.  It will be interesting to see Monday if the OI went down on the Friday rally.
JPY	Contracts:	148,911	57,069	22,261	27,235	31,981	53,628	83,690
	Change:	12,646	26,826	-4,902	2,642	-206	-19,128	15,448
	% Open Interest:		38.3	14.9	18.3	21.5	36.0	56.2
	Analysis:	In last weeks report the commercial made a minor dalliance, flipping to the long side of the yen.  This did not last long and the commercials again flipped back to the short side of the yen by a net change of over 34,000 contracts.  The large specs were on the other side, net buyers of over 30,000 contracts.  Small specs have a minor disagreement with the big specs and are a little short the yen.
CHF	Contracts:	46,351	10,888	17,653	11,581	14,648	21,097	11,265
	Change:	-2,680	-934	-3,150	1,265	-188	-3,469	201
	% Open Interest:		23.5	38.1	25.0	31.6	45.5	24.3
	Analysis:	Both large and small specs are on the same side of the market.  They are short the SF which by default makes them long the USD.  Small specs are fairly active participants in this market, but there was little change in conviction this past week.
CAD	Contracts:	128,540	47,593	7,526	44,160	21,231	27,284	90,280
	Change:	11,732	5,460	-2,753	-181	2,037	3,794	9,789
	% Open Interest:		37.0	5.9	34.4	16.5	21.2	17.2
	Analysis:	The open interest in the C$ continues its modest growth.  Large specs continue to buy and are now a 6 to 1 long.  Small specs are likewise long by a 2 to 1 margin but reduced their long during the period.
NZD	Contracts:	20,158	13,715	8,603	2,358	1,877	4,085	9,678
	Change:	-43	-926	354	474	148	409	-545
	% Open Interest:		68.0	42.7	11.7	9.3	20.3	48.0
	Analysis:	There was a very small reduction in the kiwi during the period.  The large specs who at one time was a very unbalanced long continues to reduce his net long position.  They do remain long 68% of the OI so they have some more work to do.
AUD	Contracts:	124,929	59,920	10,292	31,004	15,553	28,529	93,608
	Change:	8,022	7,274	-2,672	742	-1,598	287	12,573
	% Open Interest:		48.0	8.2	24.8	12.4	22.8	74.9
	Analysis:	For the second week in a row the large spec is a featured buyer of the A$, and reduced his short.  The large spec now owns 48% of the OI and is almost a 6 to 1 long.  The small spec is in agreement with the big spec and a 2 to 1 long.

*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 @ 1:12 PM, Mar 06   Comments(0)  Rate This Post