Nov 7-Nov 13: Futures & Options Markets More Cautious on the USD
Posted on: 13 Nov, 2018
This report intends to unveil the directional bias the smart money is supporting based on the latest changes in market positioning by leveraged, non-leveraged, commercials, small and large funds, asset managers, and dealers (unhedged traders). If one wishes to gain further insights into how to read the CoT data I publish every week, read the following report (primer).
To our Market Insights
Authored by Ivan Delgado, Head of Market Research at Global Prime. This report intends to unveil the directional bias the smart money is supporting based on the latest changes in market positioning by leveraged, non-leveraged, commercials, small and large funds, asset managers, and dealers (unhedged traders). If one wishes to gain further insights into how to read the CoT data I publish every week, read the following report (primer).
Observation: This week’s CoT reading interpretation was somehow distorted by two major macro developments that continue to drive markets. The most recent news on both Brexit and China/US trade negotiations were not captured by the latest CoT data up to Nov 13th. I am referring to the fallout in the UK government after the resignation of UK’s Brexit Secretary Raab and a number of new political uncertainties. On the China trade negotiations with the US, a tweet by Trump late on Friday led to a re-pricing of a better outcome at the G20 summit, scheduled for early December. The tweet led to algorithms pushing down the USD ahead of the weekend.
Quick Take: CoT – Futures & Options from Nov 7 – Nov 13
The move down in EUR/USD from 1.15 to 1.1250 there was a worrying absence of large specs short. Red flag!
Asset managers were aggressive buyers of EUR once again.
Leverage funds did engage in GBP longs much more aggressively vs longs ahead of the re-emergence of Brexit issues.
GBP dealers remain broadly bearish, but the trend is certainly shifting from null interest to hedge to 100k vs 40k.
The JPY bear trend kept playing out with all signs of the smart money involved in the move ahead of a weekly resistance test.
The downward correction in the Aussie came amid lower open interest, what I refer to as a false move that can be faded.
EUR contract: Far from convincing bearish extension
On the move down from 1.15 to 1.1250 there was a worrying absence of large specs short. In fact, during the fall, the commitment to add positions by large spec longs surpassed that exhibited by shorts as shown via our compilationof CoT data. Large specs long rose by over 10k and went from 149.7k to 160.5k while shots only added about 8k from 196.6k to 204.4k.
On top of the above observation, which should imply bullish connotations, open interest was literally unchanged within the same 590k range seen last week.
Even more obvious was the lack of commitment by leverage funds, where the total positioning was reduced from -102.3k to -93k after longs returned to add over 10k new contracts, while sellers in the leverage fund community barely added 2k+.
Commercials were buyers on weakness as one would expect picking bottom prices at relatively bargain levels to hedge their commercial activities. The total positioning moved from 20.1k to 30k.
No changes of note by dealers, with positions unchanged.
Asset managers were aggressive buyers once again, increasing its long-side exposure by more than 12k contracts on the move down, while asset managers short barely added 2k contracts.
GBP contract: A sell-off lacking sufficient substance
The move lower came amid lower open interest from 295.1k to 292.7k, as large specs short reduced their exposure by over 11k from 89.1k to 78.8k while longs added a paltry 0.8k, very much in tune with the uncommitted move seen in the EUR/USD.
The picture got even worse for the interest of sellers, as leverage funds did engage in longs much more aggressively vs longs.
Very interesting to see that the decline didn’t lead to an increase of commercial longs, but rather a stronger performance by commercial shorts, adding nearly 10k new contracts, a clear sign that commercials still find it attractive to engage in sales above 1.30/31, levels tested ahead of the fall captured by the CoT.
In terms of dealers, the trend is definitely supportive for the Sterling, as the exposure has been reduced from almost no need to net hedge longs by dealers (via shorts in futures) on lack of demand for GBP investment products to currently seeing a far more balanced picture of 100k longs and 40k shorts. Still broadly bearish, but the trend is certainly shifting.
Asset managers, as in the case of commercials, were more inclined to engage in short business as the data represents, with an increase from -42.5k to -45.4k. Both commercials and asset managers tend to be more macro biased, which suggests they are far from convinced that the trend will be higher at this stage.
JPY contract: Market was firmly committed to the bear side
The move up in the USD/JPY came in what has been confirmed now, via the CoT, as a smart-money acceleration. Open interest rate increased by 16k contracts from 244k to 260k, while total large specs in the JPY contract dropped from -91.9k to -105.7k. Leverage funds also replicated the bullish move.
Commercials were much more aggressive buying JPY as the price came into contacts with an area of key resistance starting at 114.00 and above. In fact, it was the largest increase since early October, taking the ratio of commercials vs open interest up to a dangerous zone of nearly 50%. When the ratio goes above 50%, investors should brace for potential reversals.
With regards to total dealers, we saw another year high of 120.2k, which essentially suggests the almost null interest for mid-to-long term JPY investment products, hence the lack of interest by dealers to hedge positions via futures.
Even asset managers became much more aggressive increasing their bets against the Japanese Yen, dialing up their short exposure from -16.2k to -21.8k. This is one of the lowest readings in 2018, only surpassed by the week of early Oct.
AUD contract: The pullback off 0.73 carried bullish connotations
The CoT captured the move down from 0.73 to around 0.7160, what is now clear evidence of a withdrawal of liquidity based on the reduction in open interest from 174.3k to 164.1k.
When breaking down what led to the fading interest, we can see how both long and short large specs reduced their positions significantly, especially the latter, taking the total positioning from -65k down to -59.2k.
Commercial may have been expecting lower levels as they failed to load up on long contracts on the move down. The total positioning was reduced from 82.3k to 75.5k.
The supply dynamics in the Aussie appear to be easing a tad, as represented by the total dealers positioning, now at 78.4k from 87k. Let’s not forget, at its peak mid-Oct it stood above 105k contracts.
Lastly, asset managers continue to bail out of their shorts as reflected by the overall decrease in total positions from -37.7k to -33.6k , mainly led by the close of over 5k contract by shorts.
Useful Resources to Collect the CoT Data
There are 4 types of reports published by the CFTC. However, there are only two we want to pay attention to, which include 1. The legacy and 2. The traders in financial futures (TIFF), with the proper version including futures and options activity. Find below these resources:
These reports are broken down by the exchange, with a futures-only report and a combined futures and options report, the latter being the one we want to stick with. It is then unpacked into reportable open interest positions for non-commercial (speculators) and commercial traders (hedgers).
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 latter the one we want to use. The TFF report breaks down the reportable open interest positions into Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables.
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. This site is very handy in case you want to crunch the numbers and conduct your own backtesting.