The average daily turnover in the foreign exchange market is over $5 trillion a day. Many traders and analysts put considerable weight on market positioning. However, it proves very elusive.
What many institutions do is analyze their own flows. I remember speaking to a central bank official about it several years ago. He said to me, if your flows are truly representative of "the market" it should should buyers and sellers of a currency offsetting each other, which will give me little information. And if your flows are not representative, what use is it?
I worked at another bank that tried a different tack. The analysts conceived of the market like a swarm of bees. What they were interested in was the bees that led the swarm. Rather than looking at where the buying and selling was coming from geographically, they organized their data flow by the execution style. They found that those accounts that may for immediacy often lead the market direction.
Such sophisticated studies are possible only at the very large banks, and typically the reports are not widely available. Retail and some institutional participants often use the positioning in the futures market to get a sense of market positioning. But here too, an open interest in the futures market of one contract consists of a short and a long position. Hence the truism: for every long there is a short.
What interests us are not all positions. The Commodity Futures Trading Commission requires (most) participants to declare whether they are a commercial, with underlying business interests, or a non-commercial, with no underlying business interest. The non-commercial is understood to be a speculator. Since their positions are seen as discretionary and directional (as opposed to hedging, for example), analysts monitor the speculative positioning. The speculative positioning is understood to be a proxy for a segment of the market that are momentum trend followers.
There are many different ways that analysts have devised for looking at the speculative positioning. Most focus on the difference between gross longs and gross shorts, which is the net position. However, we have found that gross position changes are more revealing. For example, a net speculative long position increases. This could be the result of a increase in gross longs, or it could be a reduction in gross shorts. We believe there is a fundamental difference between new buying and short-covering.
Here is the latest results of the speculative positioning in the currency futures:
After reviewing the historical record, we identified a 10k contract swing in gross position in the currency futures to be noteworthy. In the CFTC reporting week ending September 8, there were two such significant position adjustments. The first was a 14.2k jump (~10%) in the gross short euro position, bringing it to 157k contracts. This is to say that speculators sold euros as it continued to give back the gains that had carried it above $1.17 on August 24. These late shorts were in weak hands, and after the reporting period ended, the euro strengthened to $1.1350, suggesting some were likely shaken out.
The second significant position adjustment was a 13.8k contract reduction of short yen positions (~16.5%) leaving 69.8k contracts. This is the continuation of a trend seen since early August. In the reporting week ending August 11, speculators had a gross short yen position of 151k contracts. Although the media and many analysts claimed the yen rallied because it is a safe haven. A safe haven is thought to be a refuge during financial tensions that money can be parked in with less risk. Yet the data suggests that the buying of yen was a modest part of the story. The gross long position rose by 17.3k contracts since August 11. The gross short position was cut by more than 80k contracts.
Some times there is a pattern that cuts across the currency futures that may offer insight into the general view of the dollar. In the last reporting period, the gross short foreign currency futures were generally reduced. The euro and sterling was the exceptions. The adjustment of gross longs was more mixed, and minor in any event, as none changed by more than 5k contract. Our of the seven currencies we track, four changed by less than 1k contracts. This seems more consistent with a correction than a significant change in the underlying dollar bullishness.
Given the importance of the bonds and oil prices, we have applied a similar analysis to the speculative futures positioning there as well. Speculators grew their net short 10-year US Treasury futures position. This was accomplished by a 4.3k contract liquidation in the gross long position (leaving 407.8k contracts) and a 16.8k contract add to the gross short position (to 431.7k contracts). It is the second consecutive reporting period that the net speculative position was short. This followed a six-week period in which the next position was long.
The speculative market has been net long light sweet crude oil futures since 2009. In the latest reporting period the net short position grew by 11.1k contracts to 231.4k. The bulls added 3k contracts to the gross long position, lifting it 490.1k contracts. The bears covered 8.1k contracts, leaving 258.7k contracts still short.