Late Friday afternoon, the CFTC releases its latest report of the Commitment of Traders. This report, as most of you know, summarizes by futures contract the increases or decreases of futures positions held by commercials, and large and small speculators. We review the futures and delta adjusted option positions of the major currencies. If a market has been advancing and we know from the previous report the specs are buying, then next week, if the market continues to move higher, we then know specs are buying more.
For example, yesterday the open interest in the euro futures was up 15,496 contracts to a new total of about 220K contracts. When we refer to last week's report, we find that the spec is short the euro, to the tune of 53.4K contracts. The biggest share of this short is held by the large specs. So if the open interest (OI) was up 15.5K contracts, we are pretty sure the large spec increased his short positions. Had the spec been buying the market, the OI would have gone down. Yes, it is possible there could be both commercial buying and selling, to put the OI up, but this is unlikely.
Continuing with this example, we look at the price action and note the euro versus the USD went to a 2013 yearly low of 1.2751. So yesterday's selling was most likely specs extending their short positions of the euro versus a long USD.
Each week, I tally the net spec position of each of the major currencies traded at the CME and the Dollar Index to arrive at an aggregate number. This number tells us if the specs are long or short the USD. Once speculators flip from one side or another, they usually stay on that side of the market for a lengthy period. During one period, specs stayed long the USD from September 13, 2011 for almost a year until August 28, 2012. During this lengthy period, the largest USD long position was almost 442K contracts.
The most recent position change began on February 19, 2013, when specs flipped to the long side. Quickly that long position grew to 344K in last week's report. This net long was achieved even after specs sold the USD against purchases of the Australian and New Zealand currencies.
When we look at the economic fundamentals, is this positioning on the long side of the USD justified? The numbers this week are certainly mixed. On Tuesday, the Core Durable Goods number was a negative .5%, down from a positive 1.9% last month. There was a bunching of aircraft and defense orders, so the less meaningful Durable number was up 5.7%. Continuing Tuesday, the U.S. Consumer Confidence took a tumble down to 59.7, down from last month's 69.6, and new home sales were short of expectations.
Today, the U.S. numbers were not impressive. The U.S. Initial Jobless Claims number increased to 357K, the worst number in five months. The final 2012 GDP report came in at a positive 0.4%, just shy of the expected 0.5%. Personal Consumption Expenditures declined as the consumer is squeezed, however, record corporate profits fostered a jump of 1.69% in Fixed Business Investments. The PMI survey in Chicago showed a drop to 52.4 down from last month's 56.8. To summarize, nothing supportive today.
Next Friday April 5th, we get a bevy of interesting reports. First, we get the NFP Report, estimated to show the creation of 190K new jobs. At the same time, we also get the U.S. Trade Balance, estimated -44.6B and the unemployment rate unchanged at 7.7%.
While the economic news coming from the U.S. is not wildly bullish, neither is it destructive as the latest orders from Brussels, Frankfurt, and the pending plans in Tokyo.
Looking ahead, there was a recent article in The Economist about the Competitive Revolution taking place in America. They, of course, talked at length about the energy revolution taking place in the U.S. The Marcellus Formation, for example, which lies beneath most of the State of Pennsylvania has resulted in over 300,000 new jobs in the last two years in that state alone. That formation also extends from New York Sate to West Virginia and Ohio.
Energy is so cheap, compared to Europe or Asia, that chemical and fertilizer plants are being constructed in the U.S. Despite the campaign of the radical left against the Keystone pipeline, there is over 25,000 miles of pipelines in the U.S., capable of moving the natural gas over the entire country. As a result, cheaper energy will be available throughout the country.
The surplus of natural gas and the cheap price is causing energy companies to hasten the construction of Liquid Natural Gas Terminals to ship the LNG to the world. Japan has already contracted long-term contracts priced at a spread to the Henry Hub futures rather than based upon the relationship with crude. Total Petroleum is also making long-term contracts.
Education is another area where there is a revolution in America. In my former state of Florida, teachers were handicapped by the need to teach in three different languages. The states are the leadership in this area, as they have long recognized the expensive multi-billion dollar Dept. of Education created in 1979 by Jimmy Carter educates no one.
The Economist regrets the revolution is taking place at the State level without Washington leadership, lamenting they are locked in gridlock. Since Washington, like Brussels, thinks they should be in charge of everything, often little is accomplished. They can build and regulate until nothing gets done. It is likely that some of the state governors, in charge of the revolution of schools, state management of money and infrastructure repairs will eventually be moving on to Washington. Perhaps they will curtail the excessive regulations and the frivolous expenditures.
It never ends. I read today where a Federal government organization authorized the expenditure of almost $1M to study sex among New Zealand snails.
To summarize, currently the U.S. economy is certainly not setting many records but the European inability to quell the ongoing debt crises will make the euro (FXE) less desirable as a reserve currency, even if funds do not flee from southern Europe after the Cyprus debacle. With announced Japanese policies, the yen (FXY) likewise lacks appeal. The winner by default is the USD (UUP).