Friday, 22 March 2013

Quarterly Review of Changes in Volume of Currency Futures Trade

Following the expiration of the currency futures each quarter, we like to analyze the remaining volume of open contracts.  In doing so, we attempt to glean information about trader participation and preferences in the currency markets.

Granted, the futures trade is a mere fraction of the cash forex trade, but that trade is not visible.

Excel Markets Trading Contest - All Cash PrizesIn the forex market, there are many different players, and electronic trading is practically invisible. Market observers only hear about trades that someone wants you to know about - swaps the central bankers are making, and currency interventions are reported well after the trades, if at all. Further, the addition, or liquidation, of a currency from a central bank reserve status does not show up for months after the trade.

Toward the end of the expiration of a futures contract, there is often frantic activity. Decisions have to be made about existing positions. Are the positions to be kept, and moved to the next trading month or are they to be liquidated? Sometimes, the price at expiration is used as a pricing mechanism for various money or merchandise trades. The open interest at expiration can be expected to be due to some hard core players that have a reason to be in the market either as speculators or commercial traders.

The following table shows the comparison of the open interest, after the noted expiration months (numbers are rounded to the nearest thousand).

It is important to remember, the flow of funds into and out of different currencies is the ultimate fundamental that moves currency markets.  And currency values are in relation to other currencies as well as commodities and equities (FXE, FXY, FXF, UUP, FXA, FXC, FXB).

Money flowed into the currency futures markets in this quarter as the open interest climbed to a high of 1014 contracts.  The growth was not robust, less than 5%, and it is up 11.3% from last March. 

The Australian Dollar did not enjoy an increase in open interest (OI) during the quarter, but rather was a liquidating market.  The December 17 COT report showed the specs big longs, 93.1K contracts.   The price action during the quarter was negative.  At the expiration of the December futures the A$ was trading close to 1.05, and subsequently sold off near the 1.01 handle which chased the specs out and took the OI down.

The biggest price move was in the pound, which, in late December, was trading above the 1.62 handle.  At that time the specs had a sizable long, over 60K contracts.  Then, during the quarter, the specs flipped to the short side of the pound.  The last report show they are now short 79.3K.  As the specs laid on the pound they took it down under 1.49. 

Currently the OI is quite large, and with the big spec short, we would expect a short covering rally, perhaps back to the 1.55 handle.

The yen was also a significant loser to the USD during the quarter.  After December expiration, the USD was worth only 85 yen but by March the USD was worth in the 95/96 range.  Speculators caught the entire bear move.  They were short 136K contracts in the December 17 COT report, and in the latest report were still short almost 131K.  Big bucks were made in this one.

In the euro, although there was a nice increase in the size of the remaining OI from last year, there was a small reduction in the last quarter.  Trade in the euro during the quarter was trendless.  At the beginning the euro was trading above the 1.32 handle, and the specs were very small longs.  The rally above 1.36 during the quarter was quite brief, and we have since traded back under the 1.29 handle.  Specs moved from the long to the short side, and ended the quarter short about 34K contracts.

The COT reports which we follow on a weekly basis keep track of the aggregate net speculative USD position.  In a general fashion, this measures the dollar's strength, measured by where the specs put their money.  After the expiration of the December futures contracts, specs were then short a total of 177.7K contracts.  The COT report from the 12th of March shows the specs are now long 330.1K contracts of the USD versus various currencies.  This buying - of a half million contracts of USD's versus other currencies - makes me wary.  Currency trends, however, can continue for extended periods.
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