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TheStreet Open House

Commitment of Traders Report: The Long and Short of It

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marc Chandler

NEW YORK (BBH FX Strategy) -- Most observers who look at the weekly Commitment of Traders report in the currency futures market focus on the net noncommercial, or speculative, positioning.

That's because the speculative positions contain information about views while commercials are typically thought of as hedgers (having an underlying business exposure).

Observers study the net position because it combines the long and shorts into a number that can be tracked.

Yet one of the takeaways from the financial crisis is the importance of gross figures, not just net.

One example is in international finance, where the pipes have to be sufficiently robust not just to handle the net flows, but the gross capital flows.

International trade offers another example. Most economists and other observers focus on trade balances -- exports minus imports. This may be fine for some questions, but in other questions about the significance of trade or the impact on the economy, the gross figures on imports and exports may be more important than the net figures.

The same is true when looking at the Commitment of Traders report. The net speculative position is one factoid to consider, but appreciating how that was derived may be even more revealing.

Surely there is a difference between short-covering and the establishment of new longs, for example, when one is trying to comprehend price action and extrapolate potential implications going forward.

Here is a summary of the latest Commitment of Traders report that covers the week through March 27.

Euro: The net short position grew by 6,200 to 89,100 contracts. However, this was not a function of new shorts being established. They were in fact reduced by about 10,200 contracts. The longs were also cut but by more than the shorts were. This is a good example of how the net figure can be misleading.

Another way the net figure is misleading is that it makes it appear that the short position is large, but it conceals that the gross short position is the smallest since late last November.

In addition, the decline in participation prods the inquisitive investor/observer further. A further examination reveals that the euro's volatility (3-month implied volatility) is at its lowest level since August 2008. This may help explain why neither bulls nor bears are too excited right now.

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