1. This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn More.

Global Prime: Institutional-Level CoT Weekly Analysis

Discussion in 'Market Predictions and Reports' started by IvanGlobalPrime, Aug 5, 2018.

?

Do you find the analysis helpful?

Your vote will be publicly visible.
  1. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    My name is Ivan Delgado, Head of Market Research at Global Prime and FX Trader. Out of my unconditional alignment to the values at Global Prime, I am on a mission to pass on my decade-long knowledge by providing regular market commentary and other types of material that is applicable, actionable and insightful to traders (no fillers, no-nonsense). The nurturing of dozens of contacts over the years at an institutional-level has allowed me to gradually bridge an information gap between what is available to the smart money, and that of the retail trader. I want to share practical information that can be relevant to your trading decisions, and ultimately leave it up to you to decide what may best suit your own interests.

    Now let's get into the nitty and gritty...

    The CoT report, against conventional belief, does not represent a lagging indicator. The right interpretation of the data provided, published every Friday at 3:30 E.T., and reflecting the commitments of traders up to the prior Tuesday, offers comprehensive insights to gauge how the smart money is positioned. Large institutions and commercials tend to leave a trail of breadcrumbs along the way, and through the CoT, we can follow what their intentions are, therefore, it should be seen as a valuable resource.


    Euro (6E) FX (CME): “Inconclusive Price Action, Large Specs Renew Short-Side Bets ”

    Click here to access the CoT chart via barchart

    There was barely any change in open interest during the week of July 24th through to July 31st, as price action traded encapsulated within a tight 1 cent range between 1.1620 and 1.1730.

    When looking at the latest action by large specs, a bearish narrative developed as renewed short-side bets entered the market (152k shorts vs 149 prior) while longs were reduced (from 180k to 174.5k), giving us further clues of the undeterred commitment to decisively short this market by the smart money at any chance there is to be filled at levels above 1.17.

    This time, leverage funds were more shy, failing to add shorts on the bounce in price action we saw (last at -67.4k vs -68.4 prior week). As per commercial activity, it was a very quiet week mainly due to price action contained within a confined range, hence commercials’ bids/offers large unfilled on the edges 1.1750/1.1600.

    Dealers reduced their longs significantly from 55.4k to 45.7, which combined with the addition of shorts, takes us from -108k down to 123k. The recent move by these account type added to the selling pressure last week. Last but not least, asset managers kept adding to their longs, now totalling over 274k long contracts vs 115k shorts, which translate in a positive jump of over 5k in the total asset managers long. These macro accounts continue to signal they perceive genuine value to buy EURs at near-by levels.

    To sum up, last week’s price action is quite inconclusive giving the limited EUR/USD moves seen and the absence of key liquidity levels tested. The new insights we can obtain are that large specs are definitely very interested to keep selling ahead of the 1.17 area, while in the macro picture asset managers and commercials should remain quite active capping the downside moves, with greater interest sub 1.16 down to 1.15.


    Sterling (6B) FX (CME): “Bounce Seen as Opportunity to Add Shorts”

    Click here to access the CoT chart via barchart

    We saw a tepid variation in open interest (230.7k last vs 231.5k prior). As seen in EUR/USD, large specs added extra shorts in the 6B contract on the retrace up towards 1.32, indicating the firm interest to play shorts by the smart money (-48k last vs -46.5k prior), which if anything, if further confirmation that the bearish trend is likely to stay in place, barring any Brexit shocker.

    As per leverage funds, there were no changes at all. Meanwhile, as one would expect, commercials showed renewed selling interest on the correction higher, exerting further downward pressure on prices as the key 1.32 was approached. Adding to the bearish case, asset managers also added to their shorts by an aggregate of 1k+, which strengthens the notion of 1.32+ being a significant macro resistance to re-take by buyers.

    What we can learn from last week’s change in CoT positioning is that 1.3150-1.32 is perceived as a major supply area as key players (asset managers, large specs, commercials), all show a very similar interest to add shorts, essentially increase the supply imbalances and hence firming up the area as a key macro resistance. It also communicates that the bearish trend is likely to persist for the time being.


    Japanese Yen (6J) FX (CME): “Market Lightened Up Ahead of BoJ, Evidence of Yen Short Not Found”

    Click here to access the CoT chart via barchart

    Analyzing the 6J contract this week can reveal quite a few gems as the price action seen (positive 5d performance in USD/JPY) factors in the much-anticipated BoJ policy outcome. In terms of open interest, leading up to the big event the market lightened up its overall positioning from 237.5k to 232k outstanding contracts. It makes sense for liquidity to have dried up ahead of the event.

    Let’s now dive into the actual change in market positioning. The main takeaway from the large specs accounts is that a significant number of Yen shorts (over 8k) were closed due to the risk of a less dovish BoJ. Commercial accounts participated in long-sided business but very moderately while short commercials were reduced in the 6J. No surprise here as USD/JPY saw a dip ahead of the BoJ, seen as an opportunity to load up Yen shorts. As per leverage funds, the exact same pattern as seen via large specs, that is, reduction of Yen shorts heading into the BoJ decision, which went from a total of -61k to -55k. When it comes to Dealers, we would expect a decrease in the overall positions and that’s precisely what we saw, from 91k to 85.5k. Lastly, asset managers opened over 2k fresh Yen shorts vs 1k new longs, taking the total to -7k+.

    All in all, the post-BoJ rally is so far not being backed up by an evidence of fresh Yen short positions, with most of the last CoT 5d activity being about lightening up exposure ahead of the BoJ, with the subsequent overextension of Yen sales on Tuesday, Aug 31st, a move mainly driven by a removal of liquidity. Next CoT will be very quite revealing, as it will allow us to dive deeper into how big players interpret the latest tweaks by the BoJ on widening their long-term bond yield range and the adjustments on ETF purchases.


    Australian Dollar (6A) FX (CME): “Tight Range Set to Extend as Ccials/Specs Dominate Edges”

    Click here to access the CoT chart via barchart

    The open interest on the Aussie increased in the order of 3.5k, with large specs re-engaging in sales quite aggressively as the exchange rate popped up early in the week through 0.7450 on solid Aus trimmed inflation. Notwithstanding the slight pick-up in Aus trimmed CPI (fav inflation measure of the RBA), this increase on sell-side activity reveals quite a bearish picture and shows that the smart money remains firmly inclined to stay short the market, finding the bounces in price an opportunity to add into shorts. Note, lev funds, which are speculative in nature as large specs, also saw the rise in the Aussie as a chance to sell it (-28.5k vs -24k prior)

    Commercials also depict a really interesting development, as the decline through 0.74 on the positive US GDP saw plenty of activity to buy up the Aussie, which helps us understand the fairly robust price bounce towards the vicinity of the US GDP-led supply. Remember, as reported last week, these hedger-type account have been notorious buyers of the Australian Dollar through late June and all July, taking the total position to its highest level since Nov 2015, and most importantly, now making up over 45% of the total open interest, which is getting into quite extreme for an eventual more cyclical bullish reversal in prices. Looking at asset managers, their positions barely changed, while dealers added to longs (82.7k vs 77k).

    Bottom line, heading into August, expect the market to remain fairly range-bound, with the upside being capped by leverage accounts, while commercials hold the prices from over-extensions to the downside. Buying and selling towards the upper/lower ends of the range should bear its fruits.


    Important Footnotes:
    • Volume & OI: Open interest represents the total number of contracts, including both buy and sell positions, outstanding between all market participants. We should think of open interest as new business (additional liquidity). Generally, to gain conviction over a potentially developing bullish market, we could analyze whether or not open interest increases, new buyers coming in, which fuels the continuation higher on renewed commitment, ideally replicated by volume increasing or at least maintaining a steady measure. If on a bullish market, the open interest is decreasing, it has a different meaning all together, suggesting shorts covering, players stopped out, and hence money is leaving the market. This information to understand move dynamics is key.
    • Large Specs: The Net Non-Commercial Positions, often referred as Large Specs, comprise contracts held by large speculators, mainly hedge funds and banks trading currency futures for speculation purposes. Speculators, for the most part, have no need to use the futures market as hedging, with the sole intention being speculative in nature, buy or sell at a profit, before the contract becomes due. This category tends to carry large positions and are often guided by fundamental developments. Historically, they are characterized by being trend-followers and tend to get the right directional bias.
    • Commercials: Entities that are commercially engaged in business activities hedged by the use of the futures or options markets. The main characteristic of this group is that their activity orbits around the need to buy or sell the underlying contract to minimize the risk of exchange rate variations in the future. Like the large specs, this group also tends to carry large positions at times and due to the hedging nature of its activity, act as contrarian traders, best buying when prices are low and vice versa.
    • Dealers: These participants are typically described as the "sell side" of the market or net hedgers. They don’t take positions to speculate for profits but instead design various financial strategies to allocate assets to institutional clients. They help us understand supply and demand dynamics and act as liquidity providers and tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. These participants track very closely the open interest.
    • Asset Managers: These are institutional investors who tend to act slowly in established trends, which include pension funds, endowments, academic institutions, insurance companies, mutual funds and those portfolio/investment managers who predominantly represent institutional clients. Their performance is based on the average of the industry, not in the business of taking contrarian positions and/or changing their macro view that often.
    • Leveraged Funds: These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC. The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.

    .
     
  2. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    CoT Analysis: Smart Money Sets the Stage for a Higher US Dollar


    Access the full article and blog here.

    The CoT report, against conventional belief, does not represent a lagging indicator. The right interpretation of the data provided, published every Friday at 3:30 E.T., and reflecting the commitments of traders up to the prior Tuesday, offers comprehensive insights to gauge how the smart money is positioned. Large institutions and commercials tend to leave a trail of breadcrumbs along the way, and through the CoT, we can follow what their intentions are, therefore, it should be seen as a valuable resource.

    Click here to view a table of the latest legacy report.

    Click here to view a table of the latest disaggregated report.

    Click here to access the historical data.

    Click here to access a 2018 comparison table.

    Click here to access the CoT chart via cotbase.com

    In the following article, based on the Commitment of Traders report, I will expose how the unpacking of last week’s change in futures and options positioning reveals a fairly benign picture for the interest of those looking to stay long the US Dollar in coming weeks/months, barring any major unforeseen shocker. The latest CoT data exhibits that the overall market positioning is constructive and supports the narrative of a continuation in the DXY (US Dollar Index) bullish trend against ‘risk on’ currencies. I come to this conclusion after the major increases in open interest across FX majors such as the Euro, Sterling, Aussie, matching the directional moves seen in rates. Besides, the death cross in our prop risk-weighted index (chart below) is further evidence that we are entering an environment that should be dominated by ‘risk-off’ flows set to benefit the USD.

    Main Takeaways from the Euro Contract ((6E – CME))

    • The latest reading provided by the CME indicates total outstanding positions at 627,884 vs 574,970, the highest increase in open interest since late May, and it communicates that the breakout of the 1.15-1.18 range came amid a much stronger commitment to the short-side business.
    • Therefore, a continuation of the dominant bearish trendis expected, barring any major turnaround in sentiment should the US and China strike a trade deal. However, with additional tariffs on Chinese and US goods set to stay in effect until the higher-stakes summit between the US and China’s Presidents in Nov, it allows room for the decline to stay its course.
    • Total specs shorts increased by over 15k, taking the total net outstanding positions into negative territory for the first time since May ‘17. There is plenty of room for specs to add into their shorts and provide fuel to the trend due to the under stretched nature of their positioning. Large specs are often referred to as the smart money, historically providing a high accuracy rate in getting the direction of the underlying trend right.
    • Commercials bought Euros aggressively as one would expect given the elongated move. Total longs increased by 8% according to the CFTC data. The need by commercial accounts (hedgers) to buy the underlying contract increased in order to minimize the risk of exchange rate variations in the future. It was a compelling opportunity given the major decline in the EUR/USD rate.
    • Asset managers pulled the rug under the Euro and no longer appear to be adding to their perma long view, as last week’s slide revealed their total outstanding positioning at 147,500 vs 153,744, with the reduction led by renewed selling interest. This development adds to the overall bearish narrative in the 6E contract and as a result, in the bullish view for the USD.
    [​IMG]

    [​IMG]

    Source: Cotbase.com

    Main Takeaways from the Sterling Contract ((6B – CME))

    • The Contract sees the most aggressive increase in open interest this year, which coupled with the unambiguously bearish move in the Sterling market, makes the perfect case for a bearish continuation going forward. The absence of clear horizontal levels of support as reference until 1.26 provides an area with limited liquidity, which adds to the bearish view.
    • When breaking down the long vs short specs, it unpacks a rather interesting picture, as the overall positioning only added an extra -3k total spec short due to the ample rise in new long and short-side business, to the tune of almost 14 and 18k new contracts respectively. It means that there was some significantly high interest by the specs community to be buyers too.
    • As expected, commercial longs felt compelled to add into their current longs, increasing the total net exposure by almost 10k to 83.5k. These account-types are far from extreme levels, with the weekly changes not providing the slightest hint of a turnaround in fortunes for the Sterling.
    • As in the case of the Euro, and probably triggered by the technical milestone achieved in the DXY, where a major weekly resistance was finally cracked, asset managers turned more bearish, increasing their sell-side bets from -40.8k to -43.8k.
    [​IMG]

    [​IMG]

    Credit Source: Cotbase.com

    Main Takeaways from the Japanese Yen Contract ((6J – CME))

    • Open interest was barely changed, it stood at 214.1k from 214.9k. If one throws into the mix the inconclusive price action dynamics within a 100 pips compressed range, this week’s open interest fails to provide new clues worth taking note.
    • Looking into the large specs community, the data reveals that we had a mild renewal of long-side buy interest towards the Yen, with the total net positioning reduced by over 4k due to an actual rise in the long contracts opened in the Japanese currency. A bullish input for the JPY.
    • Yen commercial longs, interestingly, lightened up their positions despite they had an opportunity to add on the ephemeral rise we saw from 110.00 through 111.00. Commercials not adding is a clue that they might be expecting lower levels before piling in new longs (higher USD/JPY).
    • Asset managers tracked the dynamics seen in the large specs accounts by increasing their Yen longs within the contained range seen, which is evidence of the tentative signs of an increasing selling pressure keeping the USD/JPY prices limited to the upside.
    [​IMG]

    [​IMG]

    Credit Source: Cotbase.com

    Main Takeaways from the Australian Dollar Contract ((6A – CME))

    • The total open interest was boosted by over 14k, the highest increase since May. The increase in the number of outstanding positions was accompanied by sharp losses in the Aussie, which implies a bearish backdrop going forward and solid chances of a downtrend resumption.
    • Total large specs increased their short bets but not by as much as one would expect. The total net positioning stands at -55.1k vs -53.7. Lev funds short the Aussie saw a slightly higher short-side commitment after an increase of over 3k new contracts.
    • Total commercials remainone of the most revealing snippets of data when analyzing the Aussie. Positions remain near extremes, although they eased a bit last week given the major increase in open interest, which takes the % commercials vs open interest to 46% from 49%, with total longs increasing by just 2k, which is a fairly poor number considering the sharp move in the Aussie.It means that while commercials readings are near extremes, the weekly change is far from communicating evidence of a potential reversal with enough substance behind.
    [​IMG]

    [​IMG]

    Credit Source: Cotbase.com

    Risk-weighted index: Death cross (50 & 100 SMA)

    Additionally to the analysis conducted above, the chart below (3-day performance) illustrates that the overall risk environment is far from the positive conditions experienced back in 2017, where a stage 2 risk trend was in play. We have now entered a topping phase in risk, which more often than not entails support towards safe haven the likes of the Japanese Yen, Swiss Franc and the US Dollar.

    [​IMG]

    How to be Positioned Going Forward?

    In light of the analysis provided above, investors and/or traders should remain overall bullish the US Dollar, with the current corrective leg likely to be limited in time and extension before the resumption of the buy-flow imbalances in favor of the USD. The Euro, the Aussie, and especially the Sterling, are all set to continue its respective underlying downward trajectory. In the Euro/US Dollar, the increased supply pressure from last week suggests that any approach towards 1.1550 and 1.16 presents a great opportunity to reinstate shorts; this scenario will only be negated upon a price consolidation above the 1.1650. In the case of the British Pound, the outlook is even worse, with no end in sight to the bearish trend for the time being; levels to engage are largely dependable of your trading profile, although the side to remain most at risk is unequivocally the downside. As per the Aussie Dollar, expect the range 0.73-0.74 to cap the recovery; it would take a rise and hold above the latter to negate the bearish picture.

    Important Footnotes:

    • Volume & OI: Open interest represents the total number of contracts, including both buy and sell positions, outstanding between all market participants. We should think of open interest as new business (additional liquidity). Open interest is closely linked to liquidity. Generally, to gain conviction over a potentially developing bullish market, we could analyze whether or not open interest increases, new buyers coming in, which fuels the continuation higher on renewed commitment, ideally replicated by volume increasing or at least maintaining a steady measure. If on a bullish market, the open interest is decreasing, it has a different meaning all together, suggesting shorts covering, players stopped out, and hence money is leaving the market. This information to understand move dynamics is key.
    • Large Specs: The Net Non-Commercial Positions, often referred as Large Specs, comprise contracts held by large speculators, mainly hedge funds and banks trading currency futures for speculation purposes. Speculators, for the most part, have no need to use the futures market as hedging, with the sole intention being speculative in nature, buy or sell at a profit, before the contract becomes due. This category tends to carry large positions and are often guided by fundamental developments. Historically, they are characterized by being trend-followers and tend to get the right directional bias.
    • Commercials: Entities that are commercially engaged in business activities hedged by the use of the futures or option markets. The main characteristic of this group is that their activity orbits around the need to buy or sell the underlying contract to minimize the risk of exchange rate variations in the future. Like the large specs, this group also tends to carry large positions at times and due to the hedging nature of its activity, act as contrarian traders, best buying when prices are low and vice versa.
    • Dealers: These participants are typically described as the “sell side” of the market or net hedgers. They don’t take positions to speculate for profits, but instead design various financial strategies to allocate assets to institutional clients. They help us understand supply and demand dynamics and act as liquidity providers and tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. These participants track very closely the open interest.
    • Asset Managers: These are institutional investors who tend to act slowly in established trends, which include pension funds, endowments, academic institutions, insurance companies, mutual funds and those portfolio/investment managers who predominantly represent institutional clients. Their performance is based on the average of the industry, not in the business of taking contrarian positions and/or changing their macro view that often.
    • Leveraged Funds: These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC. The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.
     
  3. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    Access the full article and blog here.

    CoT Analysis: Market Positioned for a USD Trend Resumption, Risk of Liquidation Not Ruled Out


    Commitment of Traders – Futures & Options from Aug 15st to Aug 21th

    The CoT (Commitment of Traders) report, against conventional belief, does not represent a lagging indicator. The right interpretation of the data provided, published every Friday at 3:30 p.m. ET, and reflecting the commitments of traders up to the prior Tuesday, offers comprehensive insights to gauge how the smart money is positioned. Large institutions and commercials tend to leave a trail of breadcrumbs along the way, and through the CoT, we can follow what their intentions are, therefore, it should be seen as a valuable resource.

    Click here to view a table of the latest legacy report. These reports are broken down by the exchange, with a futures-only report and a combined futures and options report. It is then unpacked into reportable open interest positions for non-commercial (speculators) and commercial traders (hedgers).

    Click here to view a table of the latest TIFF report. These reports include financial contracts, such as currencies, U.S. Treasury securities, Eurodollars, stocks, VIX and Bloomberg commodity index. These reports have a futures-only report and a combined futures and options report. The TFF report breaks down the reportable open interest positions into Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables.

    Click here to access the historical data. In this section of the CFTC website, any entity or individual is free to download the historical data accumulated over the years of the different classified CoT reports.

    Click here to access a 2018 comparison table. This document comprises a handy personal notebook, where I annotate the most recent changes in positioning in order to assist the analysis.

    In the following article, based on the Commitment of Traders report, I dig into the latest positioning by options and futures traders from Aug 15th to Aug 21st, an analysis that helps me in gauging ‘forward-looking’ biases in the currency market. Overall, the changes in market positioning ever since the bullish breakout in the DXY (bearish euro/US dollar) continue to signal a market that is supportive of the US dollar, with the recent sell-off in the American currency mainly a result of a removal of liquidity in thin market conditions. I still see little enough evidence to suggest a turnaround in the prevalent US dollar trend, given that the majority of the contracts’ increases in August remain outstanding and were supportive of an eventual resumption in the US dollar trend.

    That said, another scenario that is slowly shaping up as a potential outcome worth taking note is the increasing risks of prolonged ‘risk-appetite’ conditions that may continue to affect market sentiment and consequently hit the appeal towards the safe haven status of the US dollar. Any continuation of the risk appetite profile seen in the last 2 weeks and we could be looking at a US dollar market in trouble, which would potentially force a mass liquidation of US dollar longs should key levels be retaken. Not the main scenario.

    As an example of factors that may undermine capital flows into the US dollar, it includes a less hawkish Fed as evidenced by the last intervention of its Chairman Jerome Powell at the Jackson Hole Symposium on Friday, renewed strength in the Chinese yuan after the re-introduction of counter-cyclical measures by the PBoC (Central Bank of China), a new NAFTA deal nearing or an easing of tensions in emerging markets. These are all risks building up for the US dollar that should not be taken for granted.

    Main Takeaways from the Euro Contract (6E – CME)

    • The recovery in the euro keeps its course amid lower open interest, which adds to the prevailing view of the overall positioning still favoring the US dollar bull trend, following a nearly 300 pips sell-off from Aug 7th to 14th on the highest open interest seen since late May this year.
    • Adding to the US dollar bullish case is the absence of buy-side engagement by large specs on the corrective wave since Aug 15, reinforcing the bearish stance. Total large specs stood flat around -5k total contracts despite the vigorous and impulsive recovery in the euro/US dollar rate.
    • Interestingly, total commercials saw a notable increase, with both net buying ratcheting up but most intriguing, commercials shorts failed to reinstate short positions even as the rate was snapped back up from 1.13 to 1.16. The lack of involvement by short commercials reveals this group felt not compelled to sell the underlying contract to minimize the risk of exchange rate variations, which tends to occur when they expect better (higher) levels to hedge. This information is a conflictive input for the US dollar and raises questions about the health of the trend.
    • Leverage funds were caught wrong-sided, as an increase of over 10k new short contracts against a reduction in 6k longs was not sufficient to see any payoff. What this also reinforces is the notion that the increase in the exchange rate runs on a worryingly thin (month of August weighs) buy-side commitment.
    • Appeasing for the interest of US dollar bulls should be the fact that dealers (net hedgers) increased their long exposure significantly on the way down, while seemingly not interested to sell at higher levels, which essentially should communicate the low need to hedge due to the limited demand of financial strategies by institutions to gain long EUR exposure.
    Main Takeaways from the Sterling Contract (6B – CME)

    • The latest changes in open interest show continued substantial increases in overall trading activity, most notably on the sell-side, with large specs shorts adding over 20k new contracts vs 11k longs, which helps maintain an overall bearish outlook given the proportionally aggressive addition of sell-side contracts.
    • What remains quite intriguing is the fact that in the sterling contract, there were no signs of commercials getting back into the sell-side despite the recovery in the exchange rate. On the contrary, commercial longs were busy adding longs as 1.27 was seen as an opportunity to hedge.
    • As in the case of the euro/US dollar, leverage funds were quite active on the sell-side, despite failing to find much follow through in a week where risk appetite dominated.
    • Dealers kept adding longs aggressively to eradicate their short-side exposure, which comes from designing financial products that get allocated to institutional clients. At the moment, the demand to short the GBP remains very strong. In this case, the spike in dealer longs is yet another reassurance that insiders at dealing desks are taking no chances to let the downside extend without being appropriately hedged via the buying of sterlings.
    • Strengthening the bearish case for the sterling is the increase in total asset manager shorts, which came at -48.5k vs -44k last. The addition of shorts by these ‘trend following’ account types is another piece of the puzzle that keeps the risk skewed to the downside.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    Main Takeaways from the Japanese Yen Contract (6J – CME)

    • After no changes in open interest the previous week, the week of Aug 15th to Aug 21st saw the open interest increase by 5.5k as the rate tested the critical 110.00 macro level.
    • Large specs were predominantly long yens, rising their bets on the Yen buy-side by 4k new contracts, although most notably, the appreciation of the currency last week can also be partly explained by a removal of liquidity, as large specs short Yen lightened up from 108k to 101k. We saw the exact same pattern play out via leverage funds.
    • The retest of 110.00, as one would expect, served as an opportunity for the commercial accounts to dial up their yen short exposure, taking the total commercial contracts from 85k to 73k, in what should be perceived as a logical strategic move by Japanese exporters.
    • The overall positioning in dealers communicates a familiar theme, that is, the overwhelming demand to allocate financial strategies short yens are forcing dealers to favour longs in a more aggressive fashion, which is for now, a clear bearish sign for the 6J contract (bullish USD/JPY).
    • Another clue anchoring the bearish view in the contract was the renewed commitment by asset managers to engage in short-sided business as 110.00 was re-tested, resulting in a total increase of net shorts from -3.8k to -8.6k.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    Main Takeaways from the Australian Dollar Contract (6A – CME)

    • Right off the bat, the first hint that last week’s rebound in the Australian dollar may lack sufficient momentum is the revelation that open interest was lower, moving from 169k to 165.7k. What this means is that the adjustment in the rate can be partly explained by a removal of liquidity.
    • There was a tepid increase in large specs longs, to the tune of 2.4k vs 1.5k shorts bailed out. The changes were rather pyrrhic and not altering the overall bearish picture, especially on the back of the strong increase in short-side open interest on the range breakout.
    • Despite commercials had yet another chance at gaining exposure to long contracts on the test of 0.72, there was no involvement whatsoever, which tells me there is a perception that risks remain to the downside, and as such, they might feel comfortable not hedging the exchange variations in expectations of lower levels later in the year, which makes sense amid the divergence in bond yield spreads between Australia and the United States, at decade lows.
    • If anything, the total inaction from asset managers last week, coupled with an increase in dealer longs, should weigh further on the case for the Aussie to stay under pressure.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    How to Be Positioned Going Forward?

    It’s undeniable that the majority of market participants in futures and options remain with allocations set to benefit if the US dollar were to appreciate from its current levels. After 2 weeks of recovery in sentiment, the market has come at a crossroad, and what we know for certain is that theEUR/USD is testing its previous multi-month range breakout point and PoC (Point of Control), one that was resolved amid an increase in both volumes and open interest. Therefore, if history is any indication, the most sensible scenario whenever a breakout carries these characteristics tends to be a continuation of the underlying trend as long as the conditions that led to aggressively bet towards the US dollar remain in place.

    The question we should ask, therefore, is, do they? Let’s look into what have been the main drivers invigorating the US dollar rally in August, and to what extent the recovery in the EUR/USD (a proxy for DXY) justifies these levels. As illustrated in the chart below, the risk profile has recovered but remains far from the hefty levels seen earlier in the month, the 2-yr German vs US bond yield spread remains largely neutral, the Italian vs German 10-yr yield premium has continued to escalate, while last but not least, the EUR/USD rate is testing the area that saw the most accumulation of volume from June until present time. All these factors argue for therecovery in the exchange rate to be limited from current levels.On the contrary, the 10-yr German vs US bond yield spread has seen a major breakout higher, and that should warrant caution.

    [​IMG]

    At the end of the day, however, I find there are still enough underlying factors that fail to justify higher levels beyond the ‘make-or-break’ resistance area at 1.1650-1.1710. However, if we were to witness a sea change that causes the buy-side to take control of the PoC, the run to the exits by an overly committed long US dollar market could be one to remember. So, have an open mind, adapt to the constant change of conditions, but be well aware that this is where the market stands as of today, Aug 27th.

    Important Footnotes:

    • Volume & OI: Open interest represents the total number of contracts, including both buy and sell positions, outstanding between all market participants. We should think of open interest as new business (additional liquidity). Open interest is closely linked to liquidity. Generally, to gain conviction over a potentially developing bullish market, we could analyze whether or not open interest increases, new buyers coming in, which fuels the continuation higher on renewed commitment, ideally replicated by volume increasing or at least maintaining a steady measure. If on a bullish market, the open interest is decreasing, it has a different meaning all together, suggesting shorts covering, players stopped out, and hence money is leaving the market. This information to understand move dynamics is key.
    • Large Specs: The Net Non-Commercial Positions, often referred as Large Specs, comprise contracts held by large speculators, mainly hedge funds and banks trading currency futures for speculation purposes. Speculators, for the most part, have no need to use the futures market as hedging, with the sole intention being speculative in nature, buy or sell at a profit, before the contract becomes due. This category tends to carry large positions and are often guided by fundamental developments. Historically, they are characterized by being trend-followers and tend to get the right directional bias.
    • Commercials: Entities that are commercially engaged in business activities hedged by the use of the futures or option markets. The main characteristic of this group is that their activity orbits around the need to buy or sell the underlying contract to minimize the risk of exchange rate variations in the future. Like the large specs, this group also tends to carry large positions at times and due to the hedging nature of its activity, act as contrarian traders, best buying when prices are low and vice versa.
    • Dealers: These participants are typically described as the “sell side” of the market or net hedgers. They don’t take positions to speculate for profits, but instead design various financial strategies to allocate assets to institutional clients. They help us understand supply and demand dynamics and act as liquidity providers and tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. These participants track very closely the open interest.
    • Asset Managers: These are institutional investors who tend to act slowly in established trends, which include pension funds, endowments, academic institutions, insurance companies, mutual funds and those portfolio/investment managers who predominantly represent institutional clients. Their performance is based on the average of the industry, not in the business of taking contrarian positions and/or changing their macro view that often.
    • Leveraged Funds: These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC. The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.
    Find out why Global Prime is the highest rated broker by number of reviews via the reputable site Forex Peace Army.
     
  4. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    CoT Analysis: Absence of Open Interest Hints Risk-Off Trend Resumption

    Author: Ivan Delgado, Head of Market Research at Global Prime

    Follow me on twitter@delgado_egea

    Follow our team’s research via tradingview

    Commitment of Traders – Futures & Options from Aug 21st to Aug 28th

    The CoT (Commitment of Traders) report, against conventional belief, does not represent a lagging indicator. The right interpretation of the data provided, published every Friday at 3:30 p.m. ET, and reflecting the commitments of traders up to the prior Tuesday, offers comprehensive insights to gauge how the smart money is positioned. Large institutions and commercials tend to leave a trail of breadcrumbs along the way, and through the CoT, we can follow what their intentions are, therefore, it should be seen as a valuable resource.

    Clickhere to view a table of the latest legacy report. These reports are broken down by the exchange, with a futures-only report and a combined futures and options report. It is then unpacked into reportable open interest positions for non-commercial (speculators) and commercial traders (hedgers).

    Clickhere to view a table of the latest TIFF report. These reports include financial contracts, such as currencies, U.S. Treasury securities, Eurodollars, stocks, VIX and Bloomberg commodity index. These reports have a futures-only report and a combined futures and options report. The TFF report breaks down the reportable open interest positions into Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables.

    Clickhere to access the historical data. In this section of the CFTC website, any entity or individual is free to download the historical data accumulated over the years of the different classified CoT reports.

    Clickhere to access a 2018 comparison table. This document comprises a handy personal notebook, where I annotate the most recent changes in positioning in order to assist the analysis.

    In the following article, based on the Commitment of Traders report, I unpack last week’s change in futures and options positioning.The data only provides marginal changes in positioning as many trading desks around the world took the week off. The removal of liquidity was the main theme when analyzing the CoT data, which when combined with the price movements seen, it reveals some valuable snippets of information relevant to the trading of G4 FX currencies.

    First and foremost, the CoT suggests a weak recovery underway in the euro vs US dollar, and it also applies to the US dollar vs Japanese yen, both running the risk of finding exhaustion as moves higher failed to garner any new commitment (via an increase in open interest) by traders. It’s also worth noticing the added pressure by commercial shorts in the Australian dollar despite the shallow bounce. From a macro view, judging by the positions of dealers and asset managers against the US dollar, the market remains long the euro, and short sterling, the aussie, and the yen.

    Main Takeaways from theEuro Contract (6E – CME)

    • As price traveled further north from 1.1550 to levels beyond 1.17, the decrease in open interest tells us the move was largely driven by a removal of liquidity, which more often than not, is a sign of exhaustion, which tends to lead to a topping formation.
    • The move higher had a clear absence of involvement by large specs. Both sides closed longs/shorts to the tune of 10k+ contracts.
    • Commercial accounts added to short positions on the move up, a contrarian play in line with the typical dynamics seen by these type of traders, who aim to hedge the underlying asset.
    • There was no interest to reinstate shorts by asset managers, despite the price recovered further, which implies the outlook by the most macro accounts remains firmly bullish.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    Main Takeaways from theSterling Contract (6B – CME)

    • Barely any changes in open interest as liquidity in the last month of Aug was substantially thinner-than-usual. The range-bounce in prices during the same period adds to a ‘non-event’ week.
    • Both long and short positions in the large specs category were closed in about equal proportions, withdrawing further liquidity from the market and making the moves more erratic in nature.
    • Same picture for the commercial account, providing null clues amid range-trading conditions.
    • Dealers and asset managers revealed nothing new, with the overall positioning still overly bearish.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    Main Takeaways from the Japanese YenContract (6J – CME)

    • The increase in the exchange rate was not accompanied by higher open interest, which makes the recovery from 110.00 a weak one, running the risk of exhausting as long interest dries up.
    • A familiar theme, with large specs long/short closing positions by about 6k contracts each, reinforcing the notion of a less substantive retracement in prices.
    • There were no changes of note in commercial accounts, as the market traded in a fairly confined range, and as a result, not attracting sufficient interest to hedge positions.
    • Dealers and asset managers saw flat changes in positioning during the last week of August.
    [​IMG]

    [​IMG]Source:CoTbase.com

    Main Takeaways from theAustralian Dollar Contract (6A – CME)

    • Open interest saw a decline of about 4k contracts in a week that saw the aussie form a V-shape type of structure from 7350 to 7250 only to be snapped back up again.
    • Specs shorts closed over 6k contracts, while longs barely badged.
    • The addition of commercial shorts in a marginally down week is a negative input for the Australian dollar, as perception grows that 7350 is now an area expensive enough to scale up their exposure.
    • Dealers and asset managers remain overwhelmingly bearish the aussie, with some asset manager shorts taking the opportunity to liquidate positions during the last month of August.
    [​IMG]

    [​IMG]

    Source:CoTbase.com

    How to Be Positioned Going Forward?

    Judging by the break down of the latest changes in market positioning, the risk of renewed US dollar and Japanese yen strength, which implies a return of risk-off conditions, looks set to be an outcome the market is preparing for. The significant absence of interest to engage in the latest ‘risk-on’-led movements as reflected by the removal of liquidity means that that leg of risk faces the prospects of being faded as exhaustion ensues. The subsequent heavy buying in the US dollar but most notably in the Japanese yen late last week as risk aversion came back, should be perceived as further evidence in line with the latest readings in the CoT report, and argues for the risk of a yen, US dollar trend resumption against the aussie and sterling as the most favourable scenario, less so against the euro, as the macro positioning remains more supportive.
    Find out why Global Prime is the highest rated broker by number of reviews via the reputable site Forex Peace Army.

    Important Footnotes:

    • Volume & OI: Open interest represents the total number of contracts, including both buy and sell positions, outstanding between all market participants. We should think of open interest as new business (additional liquidity). Open interest is closely linked to liquidity. Generally, to gain conviction over a potentially developing bullish market, we could analyze whether or not open interest increases, new buyers coming in, which fuels the continuation higher on renewed commitment, ideally replicated by volume increasing or at least maintaining a steady measure. If on a bullish market, the open interest is decreasing, it has a different meaning all together, suggesting shorts covering, players stopped out, and hence money is leaving the market. This information to understand move dynamics is key.
    • Large Specs:The Net Non-Commercial Positions, often referred as Large Specs, comprise contracts held by large speculators, mainly hedge funds and banks trading currency futures for speculation purposes. Speculators, for the most part, have no need to use the futures market as hedging, with the sole intention being speculative in nature, buy or sell at a profit, before the contract becomes due. This category tends to carry large positions and are often guided by fundamental developments. Historically, they are characterized by being trend-followers and tend to get the right directional bias.
    • Commercials:Entities that are commercially engaged in business activities hedged by the use of the futures or option markets. The main characteristic of this group is that their activity orbits around the need to buy or sell the underlying contract to minimize the risk of exchange rate variations in the future. Like the large specs, this group also tends to carry large positions at times and due to the hedging nature of its activity, act as contrarian traders, best buying when prices are low and vice versa.
    • Dealers: These participants are typically described as the “sell side” of the market or net hedgers. They don’t take positions to speculate for profits, but instead design various financial strategies to allocate assets to institutional clients. They help us understand supply and demand dynamics and act as liquidity providers and tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. These participants track very closely the open interest.
    • Asset Managers: These are institutional investors who tend to act slowly in established trends, which include pension funds, endowments, academic institutions, insurance companies, mutual funds and those portfolio/investment managers who predominantly represent institutional clients. Their performance is based on the average of the industry, not in the business of taking contrarian positions and/or changing their macro view that often.
    • Leveraged Funds: These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC. The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.
     
  5. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    Author: Ivan Delgado, Head of Market Research at Global Prime

    Follow me on twitter@delgado_egea

    Follow our team’s research via tradingview

    Commitments of Traders – Futures & Options from Aug 29th to Sept 4th
    In the following article, based on the Commitments of Traders report, I deconstruct last week’s change in futures and options positioning. Note, notwithstanding the insights one can obtain in the data from Aug 29th to Sept 4th, in this week’s analysis, I also emphasize the consequences in market positioning following what might have been a watershed moment to re-price a more aggressive Fed tightening cycle heading into 2019, as the latest CoT data still doesn’t capture these changes until next Friday.

    In a nutshell, the psychological break of 2.8% y/y in US wage growth, as part of yet another strong US NFP number last Friday, especially if backed up by a positive US CPI on Thursday, should constitute the stroke that breaks the camel’s back in terms of renewed macro interest towards the US Dollar.

    The latest data, up to Sept 4th, was fairly inconclusive, except in the Australian dollar market, which was unambiguously bearish. After the US NFP on Friday, we can now safely assume that some of the bearish USD positioning that was being built, as is the case of a rather bullish EUR report, will now have to be re-assessed, which may lead to potentially trap wrong-sided EUR longs (DXY shorts) ahead of next Thursday’s ECB meeting, when all the bets will go off and the euro’s next direction will be determined by policy outcome.

    Meanwhile, the current dynamics in the sterling and Japanese yen markets, one driven on a Brexit headline-by-deadlines basis, and the other as a function of risk-off flows, makes the anticipation of a potential directional bias not as convincing. However, it definitely suggests that positive GBP, JPY flows will struggle to make as much progress, as a re-allocation of capital is expected to join the US Dollar bandwagon in anticipation of a more hawkish Fed.

    Main Takeaways from the Euro Contract (6E – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • Price decreased with the open interest picking up from 615k to 622k. Even if at first sight it suggests renewed commitment to engage in sell-side business, the major reduction in large specs short EUR, which were cut by 15k, comes in stark contrast and communicates the drop had no interest by the smart money community, which often leads to a reversal in prices.
    • We saw a significant increase in commercial short positions from 300k to 320k, reinforcing the notion that 1.17 becomes a level of value to hedge.
    • Dealer shorts kept adding business on the way down, taking their total positioning from -75k to -95.5k approximately, which is further evidence that despite the decline in the exchange rate, the need to hedge long-side investment products in the EUR is high and it implies a market that should continue to find plenty of demand. Note, the outlier wage growth reading in the US last Friday, at 2.9% y/y may see dealers’ positioning re-adjusted and greater need to hedge supply-related activities, given that the data is likely to represent a macro shift in investors views towards the USD in order to reflect a re-pricing of a tighter Fed hiking cycle.
    • In line with the macro trend in this category, asset managers activity saw an increase in total long positions, a move that would have raised even more red flags as a bullish EUR sign if it wasn’t for the strong US wage growth figures, which made the market re-evaluate its positioning.
    • Overall, the reading of last week’s positioning is quite interesting, as it clearly shows a market that was preparing for a higher valuation, potentially anticipating the poor outlook for Aug US NFP, but was caught on the wrong-sided, as the risks have now shifted towards 1.15 and below.
    Main Takeaways from the Sterling Contract (6B – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • The open interest in the sterling market ticked up, with the overall volume increasing against the prior 5 days of CoT data. The move, however, failed to attract an increase of sell-side interest, partially led by the flush out of shorts on Aug 29th based on positive Brexit headlines which most likely led the market to re-assess their overly pessimistic assumptions.
    • Commercials increased their short exposure by over 6k as the price tested the 1.30 round number, while on the way down, there was no interest by commercial longs to add new business.
    • The move higher in the sterling does not communicate an increase in the overall demand dynamics, given the absence of dealer shorts, which actually went from 5.3k to 4.4k, suggesting that the move was very much a removal of liquidity, coupled with shorts bailing out, but it so far doesn’t reflect in the data as having caused a change in perceptions. The lack of short hedging by dealers means the interest to allocate GBP buy products in coming weeks and months remain at very depressed levels.
    • We saw quite a bit of activity by asset managers, with both long and short adding positions, the latter being more aggressive by over 2k.
    • To sum up, the market appears to be indecisive on what direction to take next, with short-term and erratic movements on brexit headlines to drive prices. As such, it is no surprise that we didn’t see an increase in demand dynamics via higher short dealers, while at the same time, the lack of renewed sell-side interest by large specs also hints at a market not as committed to playing shorts, especially considering the recent sudden spikes in the value of the sterling. Under this type of environment, traders should remain short-term volatility dependent.
    Main Takeaways from the Japanese Yen Contract (6J – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • There was no net change in open interest, while the volume was a tad higher. By looking at the large specs community, there was an addition of yen shorts, as the US dollar made a push higher towards 111.50. The up move in USD/JPY on the week proved rather limited in nature as yen longs took full control again as risk-off flows persisted.
    • The change in activity by commercials was not particularly insightful, partly owed to the fact that the price remained confined in a narrow range, which made the need to hedge positions by commercials less compelling.
    • The net increase in dealer longs continues to endorse the idea that mid to long-term, barring any prolonged surprises such as the continuous hammering of prices due to risk-off flows, the market is betting for a higher US dollar vs yen, with demand dynamics for the yen quite poor. However, note dealers tend to be extremely quick to flip their exposure in case of any shockers in fundamentals, but as of now, and bearing in mind the latest increase in US wage growth on Friday, one would expect a re-adjustment of dealers’ positioning to reflect an even more bullish stance in the US dollar.
    • The asset managers activity was very thin with no changes of note. As in the case of commercials, the lack of price volatility kept them sidelined.
    • Overall, it was a rather non-committal week to gain new insights, which tends to be the case when the price is encapsulated in a small area as was the case. In the grand scheme of things, with the bonanza in the US economy in stark contrast with the stagnant outlook in Japan, the monetary policy divergence between the two countries should continue to favor the upside in US dollar vs yen, barring major episodes of risk aversion.
    Main Takeaways from the Australian Dollar Contract (6A – CME)
    [​IMG]

    [​IMG]

    • By far, the currency that offers the most bearish picture is the Aussie, with open interest the highest in years after another substantial increase of nearly 20k positions, in a week that saw the rate collapse about 200 pips.
    • The leverage specs community added shorts, approaching the highest net short levels of the year. There is room for the rate to transition into lower levels if one takes into account that large specs have reached extremes of over 70-75k as was the case in 2015 vs the current -49k total positions.
    • The hammering of prices was perceived as an opportunity for commercial accounts to add longs, although when analyzing the total change, the increase in commercial shorts was quite notable too, even if the data analyzed saw no bounces at all and was pretty much a one-way street. Given the increase in open interest, the total percentage of commercials vs total open interest has come down from nearly 50% to 40%, which strengthens the case to see further falls on the easing of extreme reads.
    • The relationship between dealer longs and shorts continues to point at a market that remains unambiguously short, with the imbalances in supply dynamics far exceeding the demand. As a full-blown trade war between the US and China edging ever closer, the Aussie is expected to stay under pressure as the favorite proxy to play the emerging markets and risk trade.
    • If one needed further confirmation on the bearish view, the latest move captured by the CoT data saw asset managers increase their net short exposure by -27k to -30.3k, which makes the hypothesis to see plenty of selling interest on any bounce even stronger.
    • To sum up, the CoT indicates the Aussie is a currency that should remain extremely vulnerable against the US dollar, therefore any bounces in price at regular intervals should see the supply-imbalance dynamics to persist.
    How to Be Positioned Going Forward?
    Barring any major shocker in the trajectory of the US economy, or a rather unexpected positive resolution in the US vs China trade war, the conditions look set for the USD to benefit against G4 FX, although some nuances must be duly noted. Against the Australian dollar, marginal rebound sequences as well as extended in nature should continue to find committed sellers at regular price intervals, making a sell on rallies the preferred strategy. Selling strength in the euro vs US dollar is also expected up until Thursday’s ECB policy meeting when a general re-assessment of the euro attractiveness will ensue; however, judging by the positioning of the market ahead of the US NFP, the euro is still seen as quite an attractive proposition although trapped buyers may suffer near term. The sterling and the yen, when all factors considered, should see the directional bias skewed towards the downside against a stronger US dollar, even if I must emphasize that the risks of being whipsawed on political events (GBP) or risk sentiment (JPY) remain elevated.
     
  6. IvanGlobalPrime

    IvanGlobalPrime Private

    Joined:
    Aug 1, 2018
    Messages:
    25
    Likes Received:
    0
    Commitments of Traders – Futures & Options from Sep 5th to Sept 11th

    In the following article, based on the Commitments of Traders report, I unpack last week’s change in futures and options positioning. There were rather tepid changes in positioning in the euro and the Japanese yen. The sterling, however, provides evidence that a new wave of buyers has come in. Meanwhile, one more week, we saw major interest in trading the Australian dollar as a proxy for risk in China and emerging markets in a broader sense.

    As per the euro positioning, market participants were obviously cautious to gain exposure ahead of the ECB, so it’s understandable to have seen open interest reduced. The sterling, even if the BoE policy meeting was scheduled in the coming days, proved again that it’s all about Brexit. The currency found new impetus as the market appears to be growing more optimistic about the UK avoiding a ‘no deal’ scenario. The yen provided very little clues against the US dollar as both currencies are ruled by similar risk sentiment dynamics; the market is not committing for one vs the other. Lastly, the aussie continues to see very rich trading activity, with the overall stance still bearish, although the picture is muddier after the major short squeeze from Sept 12th, a day not captured by the CoT data.

    Main Takeaways from the Euro Contract (6E – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • There was an overall reduction in open interest to the tune of about 10k contracts in a week where the contract saw a directionless move. In other words, liquidity was removed off the market amid a 100 pips range between 1.1550-1650.
    • Both long/short specs closed positions ahead of the ECB policy decision. Longs were reduced by about 5k contracts vs nearly 9k contracts by short specs. What’s notable is the significant decrease in lev fund shorts, down to 102.8k from 122k.
    • Commercial accounts dialed up their interest, with longs increasing by 10k while shorts saw an additional 14k contracts added. Buy/sell by these account-types assisted in keeping the pair within a contained range amid poor interest.
    • There was barely any change in total dealer positioning, while asset managers saw a reduction of over 10k contracts, which appears to be a move by macro accounts to limit risks ahead of the ECB uncertain macro policy outcome.
    Main Takeaways from the Sterling Contract (6B – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • In a week where the sterling rose by over 200 pips, the open interest also saw a push higher of over 9k contracts, which communicates buy-side commitment behind, even if the environment remains extremely dependable to brexit headlines.
    • Large specs increased their long exposure from 66k to 72k, while about 3.3k shorts held by large specs were closed, going from 132.1k to 129.4k. Lev funds were not as determined, with no net changes by longs, just the close of shorts took place, which helped to fuel the drive higher in the sterling.
    • The move higher through 1.30 was perceived as an opportunity by commercial accounts to re-engage in short-sided business with impetus, increasing the short exposure by about 14k contracts, while only 5k longs were added.
    • There was a marginal increase in dealer shorts although the overall picture by this category remains overwhelmingly bearish. The same view applies in the asset managers, with barely any changes within the context of a bearish positioning.
    Main Takeaways from the Japanese Yen Contract (6J – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • In a week where we saw a V-shape type of move, open interest was higher by a mere 2k contracts, which is a very marginal change in the grand scheme of things.
    • Both long and short specs increased their positioning by 3k, making the latest changes quite inconclusive as to the preferred market direction. A very similar story can be interpreted by analyzing the lev funds accounts.
    • Commercial accounts kept the overall positioning unchanged, despite they added new business by over 6k contracts in each direction.
    • Asset managers and dealers provided very little clues. The former saw longs and short closed by around the same magnitude, while the latter shows no real changes.
    Main Takeaways from the Australian Dollar Contract (6A – CME)
    [​IMG]

    [​IMG]

    (Source: CoTbase.com)

    • In a week where the downtrend in the Aussie extended lower into the 0.71 area, the pick up in open interest was again very significant, increasing from 180k contracts all the way to nearly 200k, making a new year high.
    • While the overall net change in large specs was barely noticeable, by inspecting further the data, we saw an increase of about 18k longs vs 16k shorts. This development suggests counter-traders are starting to find it more compelling to engage in buy-side opportunities in the Aussie sub 0.7150/0.71.
    • Interestingly, commercial longs failed to add new exposure in the market even as the rate got hammered to 0.71. What this means is that commercials were comfortably awaiting lower levels to start hedging.
    • Looking at asset managers and dealers, the only change that strikes us as quite bearish is the increase in asset manager shorts by over 10k contracts.
    How to Be Positioned Going Forward?
    Overall, the latest futures data was inconclusive in the euro and yen futures contracts, while new directional clues were provided in the sterling and the aussie, although the latter carries a caveat to be aware of. The renewed buying interest in the sterling, which has the back-up of large specs amid rising open interest, heralds a friendlier environment to bid up the currency on pullbacks, even if such assumption runs the risk of being just one brexit headline away from being invalidated. For now, the fact that new long-sided business was added should be interpreted as growing expectations of avoiding a hard brexit, and that’s bullish the sterling. In the aussie front, the data does not negate the view of keep selling strength in the currency, even if the price action seen on Sept 12th suggests that a possible change in market structure may be looming. As long as the China vs US trade war rhetoric doesn’t improve from its current retaliatory stance, the oceanic currency is set to suffer.

    If one wishes to gain further insights on how to read the CoT data I publish every week, please read this primer I put together.
     

Share This Page