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, 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).
|Sept 2012||June 2012||March 2012||Dec 2011||Sept 2011||June 2011|
Total 925 830 871 839 671 617
The market's attention during this past quarter was focused primarily on the euro and the myriad of problems in the eurozone. If you notice the change in the OI at the end of September from the June expiration, there is an 86K reduction in the number of open contracts. In our June quarterly summary, we had these comments about the euro:
"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 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."
The euro is now trading higher than it did for most of the past three months. During that period speculators were heavily short. Perhaps the perfect solution to the European debt mess has not been discovered, but it has been close enough to diminish the huge short position. This report tells us that the euro rally versus the USD from the low twenties to the low thirties was short covering.
The total open interest in the quarter, despite the position reductions in the euro and the peg related Swiss franc, went up by 95K contracts to the highest total in the last year and a half. The gold metal in the currency popularity contest during the quarter has been the Canadian Dollar, with the silver metal going to the Australian Dollar.
During the quarter the OI in the Canadian dollar was up 110K contracts, and 50K contracts in the Australian dollar. The OI total for the C$ is 207K contracts, almost as big as the 226K in the euro. The last COT report revealed specs were long a massive 133K contracts in the C$. The total OI in the A$ is 176K, and the specs there hold a net long of 75.5K contracts. It looks like the pending global monetary stimulants has prompted the specs to make massive moves to the long side of the "commodity currencies." Disposition of the stimulus funds has been anticipated by the markets.
During the quarter the USD was hit by selling from the euro shorts who sold the USD as they covered, and by the specs getting long the Aussie and the loonie. Will these trends continue or are they about done? If they are about done, the USD may be the big winner in the next quarter.
Remember the flow of funds into and out of different currencies is the ultimate fundamental that moves currency markets. And currency values are in relation to other currencies as well as commodities and equities.