CFTC Report Analysis - The Trend is Your Friend

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Quant View – CFTC Report Analysis 23-March-2012

Harel Jacobson, FRM ([email protected])

CFTC Report Analysis – The trend is your friend

The latest CFTC positioning report published on Friday shows that the leveraged

community keeps its overall USD bullish trend. With the exception of EUR short

position, that keeps its reversal from extreme EUR-negative positioning toward

neutral, G10 positions keep on supporting the USD bull trend.

In FX, speculative EUR positions continued the trend of recent weeks, and short

EUR positions were reduced further. CHF and JPY positions against USD were little

changed last week, after falling significantly over recent weeks. In the Commodity

Block the commonwealth currencies (the AUD and the NZD) suffered a sharp

reduction of long positions, however CAD positioning keeps its positive trend. In

EM, MXN positioning keeps on being the highlight of currency positioning, with a

sharp reversal of positioning (with a reduction of 100,000 contracts since previous

week).

In Metals, speculative bullish Gold positions were reduced further last week,

continuing the downtrend in positioning. Silver positions dropped as well last week.

Industrial metals were little changed last week, yet, the trend continues to be quite

bullish.

In US Rates, Speculative positions in UST 2-years dropped significantly (hitting 2-

years' low), which is the same story looking at the positions of UST 10-years. In the

short end of the yield curve (Fed Funds contracts and 3-month EuroDollar)

positioning was almost unchanged.

In US Equities, after the recent weeks' strong uptrend, we have seen a reversal last

week. Nasdaq100 positions retracted from all-time high and S&P500 positions

dropped from a 6-month high. VIX positions were little changed last week, after big

drop in long speculative positions the previous week.



Foreign Exchange

Different week, same story. This is probably best describes the recent CFTC report.

We continue to see reduction of short positions of EUR by the leveraged

community, but overall theme is still quite USD bullish.

EUR positions were reduced further last week, continuing the uptrend since mid-

January. Last week positioning moved within 2 std. from the mean for the first time

since Dec-2011.

Data Source: CFTC/Bloomberg

Interesting to note that the move in positioning was not accompanied by a move in

rate differential (using the difference between the average Germany 2s5s10s

treasury yields and their US peers). On average, the correlation between the

change in positioning and the change in rate differential has been positive (around

0.2) over the last four years, however, since the beginning of the recent trend in

EUR positioning, correlation turned negative. This is quite a rare phenomenon,

which may imply that unless the rate differential will start favoring the EUR, the

recent trend is deemed to be short lived.

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EUR IMM Spec. Positions EURUSD Spot




In the low yielding currencies block (CHF and JPY), positions were almost

unchanged after recent weeks' sharp decline. Positioning continue to be relatively

extreme compared to the last two years, however, given the move in US yields, the

move is supported by the overall USD strength.


The Commodity Block brings us the most interesting dynamic last week, which in

my view, best represents the market sentiment regarding decoupling between the

US growth and China's growth. Last week's report shows that the leverage

community slashed NZD and AUD long positions (with the NZD exhibiting further

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Positioning and Rate Differential

20-weeks rolling correlation between change in EUR positions and rate diff.

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CHF and JPY IMM Speculative Positions

JPY IMM Spec. Positions CHF IMM Spec. Positions



weakness, after previous weeks' downward move in positions), while CAD long

positions were actually increased.


Looking at the MXN positions makes the positioning picture even more

complicated, with the positioning trend in MXN reversing the move of the recent 6-

weeks.


The main takeout of last week report is that speculators price in lower intra-bloc

correlation. While the spot market has yet to price in lower correlation between

the commonwealth currencies and the Canadian Dollar, both the implied

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AUD and NZD IMM Speculative Positions

NZD IMM Spec. Positions AUD IMM Spec. Positions

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CAD and MXN IMM Speculative Positions

MXN IMM Spec. Positions CAD IMM Spec. Positions



correlation and the correlation between W/W changes in positioning price in

weaker relationship between the three.

Metals

In the metals' class we have seen again continuation of divergence between the

precious metals and industrial metals. The precious metals continued their

downtrend in speculative positions, with sharper drop in Gold positions relative to

It looks like the move in Precious Metals' positioning is related to the move in UST

2-year and 10-year positioning (and yield). The below chart shows that the

correlation between IMM Speculative positions in 2-year and 10-year treasury

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IMM Positions and Correlation

RC-IC difference Comm. Block Avg. Correlation - Realized (via USD)

Comm. Block Avg. Correlation - Implied (via USD) IMM Positions Correlation (W/W change)

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Gold and Silver IMM Speculative Positions

COMEX Gold Spec. Posit ions COMEX Silver Spec. Positions



bonds and Gold positions has become more positive since the beginning of the

year. Furthermore, the correlation between the DXY positioning and Gold

positioning (Inverse) is near 2-years' high.

The fact that both the correlation between Gold and UST positioning and the

correlation between Gold and DXY are on an uptrend, makes me believe that the

leveraged community is pricing in better data from the US in the coming months,

and therefore a change in rhetoric by the Fed.

In the Industrial Metals, speculative positions were little changed this week,

however, the trends continues to be bullish on Platinum and Palladium.


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Gold Correlation with UST and DXY Positions

20w correlation between Gold and UST Positions (w/w change)

20w correlation between Gold and DXY Positions (inverse)

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Platinum and Palladium IMM Spec. Positions

Platinum IMM Spec. Positions Palladium IMM Spec. Positions



US Rates

Last week's change in positioning continue to show acceleration in the down trend

UST positions. The UST 2-years positions were reduced sharply last week, going in

tendem with the reduction positions in UST 10-years. Both trends are approaching

2-years' low, and look quite overdone (near 2 std. from the average of the last four

years).


At the short end of the curve, 3-month EuroDollar positions have continued the

decline started around the beginning of Feb. The decline seems to confirm the long

term trend of ED, which is skewed downward. One interesting thing to note, the

correlation between the change in 3-month ED positions and UST positions

continue to trend up (reaching four years high). This may suggest that the move in

ED futures is driven by uptick in treasury yields and not by credit fears.

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5UST 2-years & 10-years IMM Speculative Positions

UST 2-years IMM Spec. Posit ions UST 10-years IMM Spec. Posit ions



US Equities

Last week's positions' report shows a reversal of the upward trend (that started

around the beginning of the year). While the S&P500 positions declined mildly, the

Nasdaq100 positions suffered a major drop


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3-month EuroDollar Positions

3-month EuroDollar IMM Spec. Positions 20-weeks correlation between ED & UST positions



It's interesting to note that the correlation between US Equities and USD continues

to be positive. The positive correlation between equities and DXY is quite a rare

case, which tends to appear in extreme cases of positive/negative sentiment (a

smile-like behavior of DXY/US equities correlation). Based on long term dynamic,

DXY spec. positions tend to spike whenever a long term trend in equities is broken,

and reverse just before the trend reverses.

To conclude, we continue to see USD bullishness across the board. Although some

trends in the positioning start to get quite stretched (such as the positions in UST

and JPY,CHF), the overall theme should continue unless more positive sentiment

regarding global growth (mainly in china and EU).

Good Luck,

Harel Jacobson

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US Equities and DXY

Basket of US Indices (50/50 SPX & NDX) DXY IMM Spec. Positions

CFTC Report Analysis - The Trend is Your Friend

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