Oct 30-Nov 6: USD sell-off driven by removal of liquidity
Posted on: 06 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).
To our Market Research
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).
Despite the up-week in the Euro, we notice a bearish read as large specs long reduced its exposure by over 6k contracts while shorts saw an increase by 5k+.
The move up in the Sterling was a sentiment play which failed to be supported by the leverage fund community.
An inconclusive picture in the Yen ahead of the US midterms.
Aussie Dollar large spec shorts bail out after 0.7150 breakout.
EUR contract: Bearish connotations all around
The corrective leg up in the Euro was always going to face quite a challenge to extend past the 1.15 based on the recent action. As reported2 weeks ago, the initiation of the 2nd cycle down carried what I call a smart-money acceleration as open interest increased by over 30k in a push characterized by a substantial increase in EUR shorts by large specs (new year low).
The latest data captured corresponds to an up-week from 1.13 up to 1.1430, where we saw a mild reduction in open interest from 592k to 590.9 with bearish connotations once again. Bearish because large specs long reduced its exposure by over 6k contracts while shorts dialed up by 5k+. The exact same action, even more aggressive, was seen by leverage funds.
The net increase in commercials from 14.5k to 20.2 strengthens the case for 1.13 to continue being an area of major interest for hedging strategies as widely expected due to its technical significance. If one takes as reference the last time 1.13 was tested, now we have a market way more committed to playing shorts via large specs and long commercial, which heralds danger ahead as the conviction by the smart money grows.
Total dealers were virtually unchanged, while asset managers saw their buy-side exposure increase, in net terms, from 279.5k to 290.7k, which in my opinion, still communicates that in the mid-term, there is a risk of the market heading higher in line with the 2017 monstrous rally seen.
GBP contract: Move driven by the removal of liquidity
This week’s report is interesting as the CFTC data fully captures the major spike seen from 1.27 towards 1.3150. At first glance, we observe the reduction in open interest from 302.8k to 295.1k, which confirms the move was driven by a removal of liquidity. It also shows that the drive up in prices was evenly distributed in terms of large specs commitment, as the overall positioning was barely changed after each side added 4k+ contracts.
The reduction in total commercials is no surprise given the elongated up move and the opportunity it represented for shorts to reinstate new positions at better prices.
The leverage funds community turned much more bearish than I imagined, for once not mirroring the moves in large specs. Longs were cut by over 4k contracts while shorts increased by 9k.
Virtually no change in dealers positioning, which gives us a signal that the move didn’t drive greater interest in demand dynamics.
The type of accounts that saw a significant bailout of their shorts came courtesy of asset managers, lowered from -48.9k to -42.5k.
JPY contract: Inconclusive range ahead of the US midterm
Open interest kept pushing higher in a week that saw prices range. The open interest moved from 238.7k to 244k.
When analyzing the changes in large specs, yen longs showed a higher commitment, even if it fails to reveal sufficient clues as it occurred one day ahead of the US midterm election outcome.
It’s interesting to note that dealers keep increasing their longs on the Japanese Yen contract, which is a sign of the ample interest that exist to short the Yen via financial products.
The up-week came courtesy of a major withdrawal of liquidity, as open interest was reduced by over 12k contracts on the back of new hopes that the US and China may strike a trade deal in Dec.
Large specs were reduced by 5.5k ,mainly led by the bailout of shorts as the Aussie broke a key resistance at 7150.
A significant reduction in the outstanding dealer contracts, which went from 101.3k to 87k. It sends a clear signal that the market is now less interested to seek out short AUD-denominated investment products, hence the need to reduced long hedges.
The action in asset managers is also worth highlighting after the total positioning was reduced by over 6k contracts.
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.