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Following the expiration of the currency futures each quarter, we like to analyze the remaining volume of open trades. In doing so, we attempt to glean information about trader participation and preferences in the currency markets.

Granted the futures trade is a mere fraction of the cash forex trade, but that trade is not visible. In the forex market there are many different players, and electronic trading is practically invisible. Market observers only hear about trades that someone wants you to know about. Swaps the central bankers are making, and currency interventions are reported well after the trades, if at all. Further, the addition of, or liquidation of a currency from a central bank reserve status does not show up for months after the trade.

Toward the end of the expiration of a futures contract, there is often frantic activity. Decisions have to be made about existing positions. Are the positions to be kept, and moved to the next trading month or are they to be liquidated? Sometimes the price at expiration is used as a pricing mechanism for various money or merchandise trades. The open interest at expiration can be expected to be some hard core players that have a reason to be in the market either as speculators or commercial traders.

The following table shows the comparison of the open interest, after the noted expiration months. (Numbers are rounded to the nearest thousand)

June 2012March 2012Dec 2011Sept 2011June 2011March 2011
AUD126 160 105 82 99 99
POUND118 141 180 149 93 96
CAD97 127 116 85 94 123
SF54 44 35 22 53 60
EURO312 259 272 206 182 185
YEN123 140 131 127 96 114
TOTAL830 871 839 671 617 677

During the past three months, this table shows there has been an increase in the OI of the euro and the Swiss Franc. The franc and the euro are tied by a peg actively supported by the Swiss National Bank. As long as the peg continues the euro and the SF are essentially the same currency, in terms of price. Going back to June 2011, we note that the OI in the SF was 53K about the same as now ( 54). Then the specs were all loaded long the SF, and the SNB intervened and took their money. Now the specs are big shorts in the franc. We wonder if the SF might not be vulnerable to a short covering rally.

The euro OI, even after the June contract liquidation, remains quite large. There have been numerous times when the euro had the chance for a short covering rally but failed to do so. As we have pointed out observed numerous times, the big short in the euro is the big trader, or possible hedge fund operators. Until a solution is found for the euro debt mess, the OI will likely remain large and the euro will remain on the defensive.

In our last quarterly summary we wrote:

"... during the past three months, has been a big surge in the OI of the aussie Dollar. In fact, the increase in the A$ open is bigger than the total growth of the currency trade during the past quarter. If we go back to the expiration of the Sept contract, the A$ OI has doubled. We know from the latest COT report that the specs are long in excess of 76K contracts in the aussie. In this set up, we strongly suspect unless there is continued bull news, the aussie is due for a sell off."

The report was written on the 21st of March. On that day the A$ closed trade at 1.0457, and subsequently sold off to a low of .9695 on June 1st. In the process the spec flipped from a long A$ to a big short, over 64K contracts. The recent A$ rally, despite recent bearish Chinese news has probably been short covering in the aussie.

If the euro mess remains unsolved, a likely scenario in my opinion, we would expect the OI in the futures trade to build during the next six months. The euro will remain the big trader, but will there not be some buying activity for those who wish to diversify away from the euro as a reserve currency. We do have some interesting cross currents, a weakening global economy, and a flight away from the euro. It will be like going to a beauty contest, and it will be our job to pick who the crowd is going to vote the winner.

Source: Quarterly Review Of Changes In The Volume Of The Currency Futures Trade