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.

Yen: The net short yen position jumped 41,800 to 67,600. This was a function of new shorts being established (17,800 contracts) and longs being cut (24,000 contracts). This represents a further capitulation of yen bulls and is the smallest gross long position since mid-2005.

By simply looking at net positions, one would not appreciate the violence of the shift in yen positions. In early February, the gross long position was the largest since the second quarter of 2008. In late March, the gross short position is the largest since the third quarter of 2007.

Pound: The net short pound position was trimmed by 4,700 contracts to 11,100. Small longs were established (658 contracts), and shorts were pared by 4,100. The net short position is the smallest since last September, just as the net position swung from long to short.

Swiss franc: The net short position fell 3,900 contracts to 15,100. Both longs and shorts were cut (5,500 and 1,500, respectively).

Canadian dollar: The net long position was cut by 18,600 to 23,700 contracts. This was due to longs being cut (9,300) and shorts being established (9,300).

In addition to long and short positions, the CFTC also tracks spread positions. These are often so minor that they can be ignored.

However from time to time, the spread positions are important.

Spread positions fell 19,100 in the week through March 27. There is a regular pattern in the spread positions in the Canadian dollar.

Just before the front-month contract expires, there is generally a big rise in the spread positions, and after the contract expires, there is generally a large drop in the spread positions. This roll effect is not evident in the other currency futures, and it could be idiosyncratic to the practices of a few large participants.

Australian dollar: The net long Australian dollar position rose by 14,400 to 59,600. Most observers would think looking at the net figure that speculative players were more long the Aussie in the week ending March 27 than the prior week.

Yet the data show the opposite. The longs were cut by 5,400. The real story is that some of the shorts bailed. Gross short positions fell by almost 20,000 contracts.

Mexican peso: The net long peso position surged by 58,500 contracts to 82,800. This overstates the longs that were established. There were only 4,400 new speculative longs established over the week through March 27.

The driver here, as was the case with the Australian dollar, was capitulation by the shorts.

Shorts were slashed by 54,100 contracts. Recall that in the prior week there was a large jump in short positions as if the some speculators were picking a top in the peso, which has easily been the strongest major currency in the first quarter of this year, gaining almost 10% against the greenback (second place is the South African rand up 6.2% as of the end of March). However, they were quick to take profits or had second thoughts given the dollar's generally heavier tone.

We also looked at U.S. 10-year note futures and the S&P 500 futures Commitment of Traders Report. Here are the conclusions.

10-year U.S. Treasury note: Net speculative shorts rose by 15,500 contracts to almost 196,000. This is the largest net short positions since June 2010. However, the change reflected the liquidation by both longs (38,000 contacts) and shorts (22,400 contracts).

S&P 500: The net long position stands at 4,900 contracts, reflecting a decline of about 700 contracts over the past week. The longs added about 1,400 contracts, and the shorts added 2,100 contracts.

This futures contract is overwhelmingly dominated by commercials, not speculators. The speculative longs plus the speculative shorts is a little more than 20,000 contracts. The commercial longs plus the commercial shorts are more than 300,000.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.