Are the Commercial Dollar Traders Early, Wrong, or Neither?

Mish

Commercial traders are now net long the US dollar.

Extreme Reading But What Does It Mean?

Tom McClellan Dollar Tweet

Here is McClellan's Tweet.

From the comments on this post, some clarification is in order. Every futures contract is 1 long and 1 short position, held by diff. parties. Total longs=shorts always. But it matters who holds them. The commercials are supposedly the smart money, but they are often early.

Further Clarification Needed

McClellan is correct that long and short contracts net to zero. But as discussed with gold, the commercials are not the smart money. 

With currencies, the commercials consist of two groups.

  1. Importers, exporters, and raw material buyers who genuinely want to hedge against a fluctuating dollar.
  2. Broker dealers, who take the other side of the trade and those on the sell side with ETFs and other product offerings. 

Neither group is either smart or dumb. First, let's go over where one can find the data.

Disaggregated Reports vs Legacy Reports

In the Index, the disaggregated reports have nice groupings.

The legacy reports are a mess. Other than trial and error it is hard to find where various products fit. 

The Legacy US Dollar Index COTs are in the ICE Futures U.S. Group. 

Disaggregated  Report Futures Only 

US Dollar Futures Disaggregated August 4 2020

Legacy Report Futures Only

US Dollar Futures Legacy August 4 2020

Smart Money Silliness

One look at the above details show the silliness of these smart-money, dumb-money takes. 

For example, look at the disaggregated leveraged fund details. There are 21,271 longs and 19,797 shorts. 

In the Legacy report we see Commercials are long 10,550 contracts and short 2,566 contracts. 

The disaggregated report shows Dealer Intermediaries are long 1,574 contracts. 

Is this smart or dumb? 

To answer let's look at Financial Report Groupings.

The TFF report divides the financial futures market participants into the “sell side” and “buy  side.” This traditional functional division of financial market participants focuses on their respective roles in the broader marketplace, not whether they are buyers or sellers of futures/option contracts.

Dealer/Intermediary : These participants are what are typically described as the “sell side” of the market. Though they may not predominately sell futures, they do design and sell various financial assets to clients. They tend to have matched books or offset their risk across markets and clients. Futures contracts are part of the pricing and balancing of risk associated with the products they sell and their activities. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. The rest of the market comprises the “buy-side,” which is divided into three separate categories.

Asset Manager/Institutional: These are institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/investment managers whose clients are predominantly institutional. 

Leveraged Funds: These are typically hedge funds and various types of money managers, including registered commodity trading advisors (CTAs); registered commodity pool operators (CPOs) or unregistered funds identified by CFTC.  The strategies may involve taking outright positions or arbitrage within and across markets. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients. 

Other Reportables: Reportable traders that are not placed into one of the first three categories are placed into the “other reportables” category. The traders in this category mostly are using markets to hedge business risk, whether that risk is related to foreign exchange, equities or interest rates. This  category includes corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable traders not assigned to the other three categories. 

Smart Money?

The alleged commercial "Smart Money" does not exist. 

Netting this all out to suggest the commercials may be "early" is more silliness.

My chart shows the commercials were hugely short the US dollar index from May of 2018 through May of 2020 as the dollar index rose from 93 to 103. 

What was "smart" or "early" about that, besides nothing?

What about Extreme Positioning?

My chart dating to 2001 shows extreme positioning is at best a very short-term signal. 

Commercial Focus is Wrong

The focus on the commercial side is simply wrong.

Rather it is short and long liquidation by speculators that generally drives the process. 

Gold COTs

For a discussion of gold Cot positions please see Gold Soars to New High Above $2000 While Managed Money Sat it Out.

We frequently hear things like "commercials covered" their shorts or the commercials are the "smart money".

That is nonsense. The producers don't buy gold and the swap dealers are hedged (long gold and short equivalent futures). There is nothing "smart" about being forced to take the other side of a trade.

This subject comes up all the time.

For example, on December 27, Tom McClellan said "Gold COT Data Call for More of a Drop"

Gold was at the $1500 level.

On March 12, McClellan said Gold Moving Lower Despite Covid-19.

McClellan said "Gold prices should start trending down now, and for the next 5 years, according to this week’s chart."

It's pretty clear that many analysts don't understand COTs. They also do not understand the supply of Bitcoin and gold.

Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections 

The fundamental drivers for gold as well as the supply of gold and Bitcoin are also widely misunderstood. 

For discussion, please see Nonsense from the WSJ on Gold vs the Dollar.

Here's a hint: Jewelry demand is irrelevant.

Also see Misunderstanding the Supply of Bitcoin and Gold Leads to Silly Projections

Mish

Comments (14)
No. 1-7
tokidoki
tokidoki

Nothing goes to hell or heaven in a straight line. We've seen so many predictions about the dollar on its last legs, but hold on there Silver, we'll see occasional violent rallies from time to time.

The dollar goes to hell in a straight line only in the case of Civil War.

ColoradoAccountant
ColoradoAccountant

Audit Ft. Knox, The Fed, and Wirecard.

PecuniaNonOlet
PecuniaNonOlet

86 days till election.

Tony Bennett
Tony Bennett

I keep a close eye on Federal Reserve balance sheet.

5 of last 6 weeks it has shrunk.

Mainly from paring down repos and currency swaps (with other central banks).

Only a matter of time before global $US crunch ... sending it higher.

Casual_Observer
Casual_Observer

Legitimate question now that Trump seems on undoing the payroll tax by executive order. Will he also just remove any federal taxes altogether or just tax red states lower or tax states lower in exchange for votes ? Nothing is off the table in Trumpland. Now he is forcing people to take him to court.

Casual_Observer
Casual_Observer

If every dollar that use to go to government now goes to people for spending then the Republicans get their dream of eventually cutting everything including social security and medicare and Medicaid to almost nothing. This may become a test of how far the Fed will go to monetize the government directly.

Advancingtime
Advancingtime

We are seeing rising interest in both precious metals and cryptocurrencies. Several factors are driving this trend. One is the idea governments have targeted cash and wish to move us towards a "cashless" society where they control our every move. Another is rooted in the idea inflation is about to raise its ugly head as currencies are debased.

Most likely the dollar will be around for a while yet and could be about to strengthen. More on the state of currencies in the article below.