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The foreign exchange market is an overwhelmingly over-the-counter market. Yet its lack of transparency, relative to the considerably smaller but somewhat more transparent futures market, encourages investors and analysts to watch the weekly Commitment of Traders report.

Positioning, as we have previously discussed, is one of two kinds: commercial, with the underlying business interest, and non-commercial, which is associated with speculation. It is the non-commercial positioning that is thought to contain the most important information about positioning, as a large part of the commercial positions are believed to be related to hedges or other business-related issues and not necessarily a view of market direction. There are non-reportable positions which are not included here.

As we look at the latest weekly report, remember the data covers the week through February 21, so the euro's push higher in the second half of the week and the yen's decline is unlikely to be fully captured yet.

Euro: The net speculative short position was trimmed to 142.3k from 148.6k. This still reflects a historically large short position. The euro's recovery that began in mid-January and has carried through February has not seen commensurate reduction of the net short position. It had begun the month near 157.6k.

Given the sharp reduction in the premium for euro puts relative to calls (risk reversals), it appears that some large players may have kept the short euro core position and hedged in the options market by purchasing calls. Earlier this month, it appears the call positions were being unwound, leaving that market segment with a more short euro exposure. However, the latest leg-up in the euro appears to have caught them wrong-footed.

Drilling deeper, speculative euro longs are building and now stand at 29.4k. Short euro positions were reduced by a little less than 4k. Commercials reduced both their long and short positions (by 7.8k and 2.2k, respectively).

Yen: The net speculative position remains long yen, but the bulls are capitulating. The net long position stood at 17.3k as of Feb 21, compared with 29.4k the previous week, and 55.2k at the start of the month. Yet in the most recent week, the yen longs did not get out as much as new speculative shorts were added (-2k vs +10.1k respectively). Commercials bought added to longs slightly (3.3k), while short yen positions were cut by more than 17k.

There has been an interesting development in the yen options market, which we have pointed out before. Typically, yen calls trade at a premium for yen puts equidistant from the forward strike. The explanation is that Japanese exporters and investors use the options market to protect overseas earnings. However, over the past couple of weeks, this is no longer the case, and for the first time since the Bloomberg data series began (October 2003), yen puts are selling at a premium to yen calls.

The decline in yen calls relative to puts began taking place well before the yen's recent fall. Arguably the risk-reversals began recovering beginning last September, but it was not until the end of the 2011 that the trading range was broken and not until the second half of January that puts began trading at a premium.

Sterling: Net speculative sterling shorts were cut to 31.3k from 40.6k, but the net short position remains higher than it started the month (26.3k). Through February 21, the sterling has been essentially flat against the dollar and has slipped against all the other G10 currencies, save the yen.

In the most recent week, speculative positioning was reduced. Longs were cut by almost 8k contracts, while short were reduced by almost 11k contracts. For their part, commercials trimmed longs and added to short positions.

Swiss franc: The net short speculative franc position was extended marginally to 19.8k contracts from 15.9k. This reflected the increase of short positions, as long positions were slightly extended. Commercials add slightly to both long and short positions.

Canadian dollar: Speculative players have been building a net long CAD position for the past three reporting weeks. In the latest week, the net long rose about 4.5k to 14.1k contracts. Speculators were net short 19.4k contracts at the start of the month, making it the only currency futures that the net speculative position reversed.

Of note, speculators added to long and short Canadian dollar futures positions in the week through February 21 (9.3k and 4.8k contracts, respectively). Commercials trimmed longs and added to shorts.

Australian dollar: Speculative positioning is little changed. There was a net long 74.7k contracts on February 21, an increase of 1,000 contracts over the past week, which still leaves it a little more than 3k less than at the start of the month.

Since the start of the month, the Australian dollar is net-net up about 0.4% against the greenback, making it the third worst performer in the G10, behind the sterling and the yen. Given the risk-on environment that has seen equities motor ahead, the rally in the Shanghai Composite, the required reserve cut in China, and the rally in oil prices, one might have expected a stronger performance by the Australian dollar.

Both speculators and commercials spent the past reporting week reducing exposure. Both market segments trimmed long and short positions.

Mexican Peso: Net long speculative positions continue to build. There was a 8.2k increase in net long peso futures contracts to 49.4k. The net long position has more than doubled this month. The peso itself has appreciated almost 2% against the US dollar, which means that it has outperformed the G10 currencies, except for the Norwegian krone and Swedish krona.

Breaking the net position down shows that speculators added 10.3k long contracts, but also shorts by 2.1k. Commercials also took on more exposure, with long positions growing 4.5k, and short positions rising 13k.

Disclosure: No positions

Source: Note On CFTC Commitment Of Traders