Ralph Shell's  Instablog

The rally in the EURUSD, long anticipated and welcomed by many, lacks vigor. In the days of trading on an exchange floor where I spent many years, short covering rallies were frantic, noisy affairs as the trapped shorts scrambled to get out.

This rally is different. On-line trading is quiet, a solitary affair, much calmer than being in the middle of the floor where a bunch of screaming brokers are trying to cover shorts for themselves and their customers. Does this mean the quiet solitude of the trader and the quote screen, result in markets less exposed to the emotion of the moment?

There is another anomaly in this rally. We know from the last COT report shorts in the CME futures had a record position, 187,876 contracts of futures and delta adjusted options, up from the previous week's record. Others in the trade are quite aware of this big short position, and have been attributing the rally to short covering.

There is a problem with this theory. The open interest in the futures market, until today, had not been going down. There was a small 5.1K contract reduction down to 310K contracts total, but until today the open interest had still been climbing. This means the bears who were in the market at the low on Jan 16th are still short, and they have been joined by a few new players. Perhaps the composition of the trade in the cash markets is different, we don't know, but there has been no short covering rally to date, in the euro.

There are some meaningful reports coming later this week. At 4:00am tomorrow we get the German Ifo Business Climate Report, followed later in the day by Pending home sales in the US, and then the press conference announcing the results of the Fed's two days of meetings. Obviously any big deviations from average guesses have the capability of jolting the markets.

The strength of the US economy has been a surprise to many. Thursday US numbers on m/m Core Durable Goods Orders, expected up 1%, Unemployment Claims, estimated to be 371K, and New Home Sales, estimated 322K will all be meaningful, but the most important number should be the q/q Advance GDP on Friday.

The average guess for the GDP is a surprising 3.1%, up from the previous quarter's 1.8%. Some of the pundits think this number reflects, in part, some inventory building, which will hurt next quarters performance, therefor of less importance.

So the US we has the possibility of some positive numbers. In Europe, we have an assemblage of politicians, finance ministers, bankers, economists, and well connected business leaders meeting in Davos Switzerland. Considering the current concerns expressed by the IMF and the World Bank, will there not be a lot of concern and angst about the future of the euro and the European economy. And, is it possible such a large group can offer some meaningful solutions to what appears to be an increasingly dysfunctional group, drowning in debt?

It is beginning to look to me like the euro bulls have had a chance to rally the EURUSD, and have failed to turn in a very convincing performance. We are inclined to watch the data, and the news and pick spots above the 1.30 handle to try the short side of this pair.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Speculators reduced their net USD long positions during the latest period by 36, 555 contracts.  The reduction in the aggregate long USD position was accomplished by the speculator's purchases of the yen and the A$ against which the USD was sold.  There was also some minor reductions in the short of the DI, and the pound but specs continued to sell the euro.

       The total USD long, versus shorts in the rest of the market was down to 204,468 contracts from 241,023 in the previous period.

The cut off date for this report is Tuesday afternoon.  Most of the euro weakness occurred later in the week, so we will have to watch the OI to see if that was opening or liquidation trade late last week.

• US Dollar Index: There was a small increase in the OI as the small specs, not big players in this market added to their longs.  Small specs are now a 6.3 to 1 long, about the same as the large spec who holds a 6 ratio long.
• Euro (EUR/USD): Large specs added to their positions and they are now 137, 746 short.  The total spec short position in the euro is up to 167,583, from last week's 158,088.  Spreading remains quite large, 10% of the total OI, which suggest many of the positions may be hedged in options.
• British Pound Sterling (GBP/USD): Specs remain short the pound, but unlike the euro, the short positions are not large nor is the short ratio very high.  There was a modest increase in the total spec short position by 6.4K contracts in the reporting period.
• Japanese Yen (JPY/USD): The biggest increase in any of the futures contracts this past week was in the yen, up 26.6K.  Large spec were the biggest buyers of the yen pumping the long yen ratio up to a 5.0 ratio long.  Small specs do not hold the enthusiasm for the yen,  and remain short the yen.  This suggests the global specs may not be favoring the yen to the USD.
• Swiss Franc (CHF/USD): Gradually both the large and the small specs are adding to their positions.  The OI is building after the massive intervention designed to weaken the Swisses value last summer.  Specs are now going the other way now and building a short, and currently are a 6.7 to one short.
• Canadian Dollar (CAD/USD):There was little change in the C$ weekly activity.  Large specs are close to a 2 to 1 long, and the small specs are a minor short.
• New Zealand Dollar (NZD/USD): There was little activity or change in this market during the past week.  The large spec has a small long and the little spec is a minor short.
• Australian Dollar (AUD/USD):  The OI builds in the A$, and the large spec continues  to add to the long side.  The total spec OI long in the A$, versus a short USD increased to 48.9K up from 34.8 in the previous week.  Speculators, seemingly habitual longs in the A$ are up from a low long position of only 6.5 contracts back on 11 29 2011.

Currency Commitments of Traders with Delta-adjusted Options and Futures Combined, data through January 3, 2012
US Dollar Index (USD/EUR,JPY,GBP,CAD,CHF,SEK)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	67,118	50,780	8,387	8,927	1,380	6,072	56,012
Change:	1,413	-1,482	-730	2,455	-383	364	2,451
% Open Interest:		75.7	12.5	13.3	2.1	9.0	83.5
Euro (EUR/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	329,463	40,424	178,170	31,938	61,776	224,183	56,600
Change:	10,751	-5,061	5,745	2,923	1,612	9,636	141
% Open Interest:		12.3	54.1	9.7	18.8	68.0	17.2
British Pound Sterling (GBP/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	198,554	27,786	59,344	13,330	29,245	154,836	107,363
Change:	10,714	2,356	5,121	-1,353	2,276	9,486	3,092
% Open Interest:		14.0	29.9	6.7	14.7	78.0	54.1
Japanese Yen (JPY/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	166,661	73,030	16,238	22,727	28,646	67,718	118,591
Change:	26,601	20,181	-13,894	6,262	873	-231	39,233
% Open Interest:		43.8	9.7	13.6	17.2	40.6	71.2
Swiss Franc (CHF/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	40,439	3,241	15,698	8,646	18,909	26,682	3,962
Change:	2,178	5	1,536	974	51	1,258	651
% Open Interest:		8.0	38.8	21.4	46.8	66.0	9.8
Canadian Dollar (CAD/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	126,694	27,561	51,185	28,597	23,412	67,149	48,709
Change:	1,454	-448	1,196	1,484	-581	256	677
% Open Interest:		21.8	40.4	22.6	18.5	53.0	38.4
New Zealand Dollar (NZD/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	10,812	7,857	5,421	2,043	2,182	687	2,984
Change:	631	1,286	255	198	-257	-853	633
% Open Interest:		72.7	50.1	18.9	20.2	6.4	27.6
Australian Dollar (AUD/USD)
		(1) Large Traders	(2) Small Traders	(3) Commercial
	Open Interest	Long	Short	Long	Short	Long	Short
Contracts:	127,616	69,863	23,225	21,456	19,175	29,270	78,188
Change:	8,810	9,922	-4,127	1,807	1,705	-4,120	10,030
% Open Interest:		54.7	18.2	16.8	15.0	22.9	61.3

To view the COT report released by the CFTC please see the attached file. For general information about the COT report please see the article The CFTC Commitment of Trader Report

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The trading week is only about half over and already we have had two major events, injecting volatility into the forex markets.  The grand plan to fix the euro, the banks and the sovereign debt crisis, carefully designed to protect the interests of the French and Germans, is becoming unraveled. The Greek PM has decided that it is best to give the populace a vote.  In return for receiving their next stipend due in November and remaining in the euro, they must continue preparation for austerity and poverty for the balance of the decade.

Naturally this has the current class of European leaders uneasy.  What if the unwashed masses in Greece vote to tell these leaders to take their euro and shove it?

Currency intervention in the yen by the Bank of Japan and the Japanese Finance Ministry was the other major event.  After weeks of grumbling by various Japanese interests about harm, caused to the economy by the strong yen, they took action.  It looks like they bought about $100B USD's against the sale of ¥7.5 to 8T.  Quickly the USD appreciated from 75.57 to 79.53, before relaxing and selling back to the 78 handle.

The popularity of yen ownership has hurt Japanese business.  Sony for example, today reported a loss with revenue down 9.1% and cited the strong currency as a major problem.  If conditions remain unchanged, Sony expects the yearly loss of well over $1B.  With 80 of the Fortune 500 companies headquartered in Japan, Sony will not be the only business losing money because of the strong yen. 

Futures speculators, buying the yen because the yen was touted as a safe haven also took a hit. The latest COT report revealed speculators had accumulated 56,981 contracts of net long positions.   As might be expected the yen weakness this week was helped as the long specs liquidated.  The open interest in the CME futures was down 29,159 contracts in the two days after the intervention.

If the Japanese bought only the USD against their yen sales, this is note worthy.  Why do they not have concern about the yen's relationship with the A$, the euro or the pound?  Or are they less friendly to the other currencies?  

The appeal of the yen is likely to remain.  They do have a sovereign debt problem but they have an accommodating central bank, large domestic savings and healthy and viable industries.  Further, with the highest corporate tax in the world, there are many billions waiting for an incentive to be repatriated. 

After prior interventions, the interveners generally backed away and let the market trade, which meant the yen strengthened.  The pound has gained on the yen, moving from 117 to above 1.27.  Should this weeks volatility give us a return to the 1.2550 lets try to sell the GBP and buy the Yen.  Alternatively sell a partial lot at around the 1.2450 area and sell the other half lot on the rally.  Usually the yen intervention is a one shot deal.  The pound suffers because of a tepid recovery and do to fear of its banking relationship with those across the English Channel.