Position Adjustments In The Currency Futures

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Includes: FXA, FXB, FXC, FXE, FXF, FXM, FXY, KGSPY
by: Marc Chandler

Most observers who look at the weekly Commitment of Traders report in the currency futures market focus on the net non-commercial or speculative positioning. The speculative positions rather than the commercial positions are studied because they contains information about views while commercials are typically thought of as hedgers (having an underlying business exposure). The net position is studied because it combines the long and shorts into a number that can be tracked.

Yet one of the take-aways from the crisis is the importance of gross figures not just net. The pipes of international finance, for example, have to be sufficiently robust not just to handle the net flows, but the gross capital flows. Another example is trade. Most economists and other observers focus on trade balances--exports minus imports. This may be fine for some questions, but other questions about significance of trade or the impact on the economy, the gross figures or imports and exports may be more important than net figures.

The same is true when looking at the Commitment of Traders. The net speculative position is one factoid to consider, but appreciating how that was derived may be even more revealing. Surely there is a difference between short covering and the establishment of new longs, for example, in comprehending the price action and extrapolating potential implications going forward.

Here is a summary of the latest Commitment of Traders report that covers the week through March 27.

Euro: The net short position grew by 6.2k to 89.1k contracts. However, this was not a function of new shorts being established. They were in fact reduced by about 10.2k contracts. The longs were also cut but by more than the shorts were. This is a good example of how the net figure can be misleading.

Another way the net figure is misleading is that it makes it appear that the short position is large, but conceals that the gross short position is the smallest since late last November. In addition, the decline in participation prods the inquisitive investor/observer further. A further examination, reveals that the euro's volatility (3-month implied volatility) is at its lowest level since August 2008. This may help explain why neither bulls nor bears are too excited presently.

Yen: The net short yen position jumped 41.8k to 67.6k contraction. This was a function of new shorts being established (17.8k contracts) and longs being cut (24k contracts). This represents a further capitulation of yen bulls and is the smallest gross long position since mid-2005.

By simply looking at net positions, one would not appreciate the violence of the shift in yen positions. In early February, the gross long position was the largest since Q2 2008. In late March the gross short position is the largest since Q3 07.

Sterling: The net short sterling position was trimmed by 4.7k contracts to 11.1k. Small longs were established (658 contracts) and short were pared by (4.1k) The net short position is the smallest since last

September, just as the net position swung from long to short.

Swiss franc: The net short position fell 3.9k contracts to 15.1k. Both longs and shorts were cut (5.5k and 1.5k.

Canadian dollar: The net long position was cut by 18.6k to 23.7k contracts. This was due to equal measure ore longs being cut (9.3k) and shorts being established (9.2k). In addition to long and short positions, the CFTC also tracks spread positions. This are often minor that they can be ignored. However from time to time, the spread positions are important. Spread positions fell 19.1k in the week through March 27. There is a regular pattern in the spread positions in the Canadian dollar. It just before the front month contract expires there is generally a big rise in the spread positions and after the contract expires a large drop in the spread positions. This roll effect is not evident in the other currency futures and it could be idiosyncratic to the practices of a few large participants.

Australian dollar: The net long Australian dollar position rose by 14.4k to 89.6k. Most observers would think, looking at the net figure that speculative players were more long the Aussie in the week ending March 27 than the prior week. Yet the data shows the opposite. The longs were cut by 5.4k. The real story is the some of the shorts bailed. Gross short positions fell almost 20k contracts.

Mexican peso: The net long peso position surged by 58.5k contract sot 82.8k. This overstates the longs that were established. There were only 4.4k new speculative longs established over the week through March 27. The driver here, as was the case in the Australian dollar, was capitulation by the shorts. Shorts were slashed by 54.1k contracts. Recall that in the prior week there was a large jump in short positions as if the some speculators were picking a top in the peso, which has easily been the strongest major currency in the Q1 12, gaining almost 10% against the US dollar (second place is the South African rand up 6.2% as of the end of March). However, they were quick to take profits or had second thoughts given the dollar's generally heavier tone.

We looked at US 10-year note futures and the S&P 500 futures Commitment of Traders Report. Here are the conclusions.

10-year US Treasury note: Net speculative shorts rose by 15.5k contracts to almost 196k. This is the largest net short positions since June 2010. However, the change reflected the liquidation by both longs (38k contacts) and shorts (22.4k contracts). Perhaps it reflects frustration and the belief/suspicions, US 10-year yields are moving from a trending market to a sideways market.

S&P 500: The net long position stands at 4.9k contracts; reflecting a decline of about 700 contracts over the past week. The longs added about 1.4k contracts and the shorts added 2.1k contracts. This futures contract is overwhelmingly dominated by commercials not speculators. The speculative longs plus the speculative shorts is a little more than 20k contracts. The commercial longs plus the commercial shorts are over 300k.