Speculators Reduce USD Longs - COT Data 3rd July 2012 Reveals

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Old Jul 11, 2012, 8:46am   #1
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Speculators Reduce USD Longs - COT Data 3rd July 2012 Reveals

The latest COT report, released a day late, show that the speculators made a small reduction in the aggregate USD long position to 271,883 contracts. This is a reduction from 312,479 in the previous period. The biggest spec short is in the Euro, 181,357 futures contracts and delta adjusted options. This does represent a reduction from previous weeks, but is still a massive number.

Speculators are also long the Dollar Index, 43,253 contracts, which puts them short the basket of currencies within the DI. (EUR, JPY, GBP, CAD, SEK, and the CHF) Speculators are also short 32,552 contracts of the Swiss Franc.

Frequently I am asked by traders how the information can be used to select trades. Trading from information in the COT alone is not sufficient to make a trade. The information gleaned from the report needs to be used in conjunction with other inputs, and there are many that can send the market up or down.

In currency markets, the flow of funds, entering or exiting the different markets, responding to fundamental economic news releases or psychology, results in determining price. The COT report gives us a glimpse of the market composition at the end of the reporting period. From this we have a general idea which group thinks the market is going up or down. Further, by looking at the trend in the open interest we can get a good idea if the dominate group is adding or liquidating their position.

Looking at this week's data, we are obviously aware that the big spec positions are in the Euro, and by virtue of the SNB peg their cousin, the Swiss franc. These positions are very lop-sided with the markets loaded with shorts. Markets, when loaded with too many longs or shorts can often punish the late arrivals in those positions. So far this has not been the case but reversals occur when least expected.

This report shows there were some cautious longs that exited the market. After the end of the report, July 3rd, the Euro was under pressure for the balance of last week. We know the reasons for the sell-off but how did the specs respond. Did the longs bail, and the OI goes down, which means shorts also exited the market.

The recent COT report cut off is July 3rd. This snapshot of the market, in a general way tells us about market composition. From this we must watch and judge how the news, relevant or otherwise, causes the market to react. It is helpful then, to look at the daily Volume and Open Interest Report from the Chicago Mercantile Exchange. At the end of a week, the new open interest will be incorporated into the new COT Report.

  • US Dollar Index: Specs remain long the DI by a little over a 4 to 1 ratio. They did reduce their long by 4.5K contracts during the period.

  • Euro (EUR/USD): The OI declined by 21.7K contracts primarily because the large spec was reducing his short Euro position. Large specs are a 5.4 ratio short and the small spec is a 2 to 1 ratio short. The total spec short in the Euro was reduced from 198.5K to 181.3. Spreading, likely option trade is 9.3% of total OI. Last week the break in the Euro occurred after cut off for this report.

  • British Pound Sterling (GBP/USD): For the second week running the large spec in the pound flipped his position, this time back to the short side. They have joined the small spec who is short 11.2K contracts. The total spec short is only 15.8K contracts.

  • Japanese Yen (JPY/USD): There was a slight reduction in the OI as the large specs reduced both long and short positions. The large and small specs differ in their market bias with the large specs long 5.6K contracts of the yen while the little spec is short 22.8K contracts.

  • Swiss Franc (CHF/USD): Since the Swiss National Bank has chosen to peg the SF with the Euro, the franc has merely come a proxy for the Euro. Consequently the large specs are 5 ratio short and the small spec is a 2.7 to 1 short. The total net spec short was reduced to 32.5K from 38.2K.

  • Canadian Dollar (CAD/USD): There is no agreement among the small specs which way this pair is going. Last week the small spec was short and now they are long, but only a couple hundred contracts. Large specs are also long a minor amount of the C$.

  • New Zealand Dollar (NZD/USD): The OI in this currency is very small, like the country, but it did increase by almost 20% in the period. Both spec groups bought the Kiwi, and their net long is up to 5.8K.

  • Australian Dollar (AUD/USD): There was a small increase in the OI as the large specs flipped their position, buying the Aussie, and taking a small long. Small specs are on the other side of the market, and are short. Although the OI in the Aussie is large the net positions are close to even.

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For general information about the COT report please see the article The CFTC Commitment of Trader Report

I have no positions in any stocks or currencies mentioned, and no plans to initiate any positions within the next 72 hours.
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