Thursday, 11 September 2014

Trading Volume Soars in Currency Futures - USD Demand Continues

Ralph Shell, Excel Analyst

As traders know, when the size of your account grows, an increase in trading volume soon follows.  Unless, of course, you are one of those rare disciplined traders who takes money out of the account and time away from the market after a serious of successful trades. 

Speculators were correct with their large bearish bets in the euro and the yen.  Now, with the increased equity, the trading volume has forged ahead.  Yesterday at the CME forex futures markets, there were 1,659, 838 contracts traded,  At day's end, the total open interest in all futures contracts was 1,687, 451 contracts.  This shows the turn over was almost the entire OI of CME currencies in a day. 

The most actively-traded currency is the euro, which finished the day with total OI of 484K.  This represents an increase in the OI of 41,117 contracts in a day, which tells us the specs are continuing to sell the euro.  How do we know?  The most recent COT report with data from September 2nd, showed specs were short 211,006 contracts of futures and delta adjusted adjusted options.  Since the OI has gone up significantly for the past two days this means there are new shorts entering the market.

Each week in our COT report, we calculate the net USD position the the seven currencies we follow plus the DI contract.  The total last week was a USD long of 357,338 contracts, which was the largest USD long since July 2013.  Judging by the demand for the USD, we suspect the net dollar long will exceed 400K contracts in the report which is scheduled for release this Friday.

Another feature in recent COT reports was a demand for commodity currencies.  Speculators had accumulated long positions in the Australian Canadian  and New Zealand dollar which collectively totaled 71.1K contracts last week.  Since these contracts are traded in USD's this meant they were short the USD.  It looks like broad USD demand put pressure on the commodity currency longs.  The biggest position was a 49.5K contract long in the Australian Dollar.  These longs were spanked soundly as the AUDUSD traded under the 200-day SMA.

Click to Enlarge AUDUSD Daily Currency Chart

A seemingly universal demand for the USD may have caused some selling in the Canadian Dollar, weakening the loonie to 1.1030 yesterday.  Unlike the Aussie, the C$ did not continue in a free-fall after printing the lowest price since April 2014.  The absence of a heavy spec long, only 11k, may be one of the reasons the loonie failed to follow through to the down side.

A major reason for the recent USD strength is the market's perception that the US recovery will continue putting pressure on the Fed to speed the date for a rate hike.  The recent increase in US yields may have been mistakenly taken as confirmation of this trend.  Rather than a change in the macro trend, this may merely be the traditional sell-off in bonds ahead of a Treasury auction.

Today (Wednesday, 10th September 2014), they peddled $21B of ten-year bonds for a yield of 2.535%.  Indirect bidders, which include the foreign central banks, was brisk.  They bought 53% of the total, and the bid to cover ratio was a 2.7 to 1.  Tomorrow the auction will continue with the sale of $13B of the US long bonds.  Often bonds sell off ahead of an auction and rally once it is over.

There is no sign the scramble to buy USD's is over, but the trade is quite popular.  We shall see if the good news keeps coming.  Tomorrow we get the initial jobless claims, 300K expected, and on Friday Retail sales, expected  to be an increase of 0.6%. 

It is a volatile, trading market.  Best to manage your money carefully.
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