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Quant View COT Report Analysis

Harel Jacobson, FRM (Harel@Barak-Capital.co.il)

20-April-2012

COT Report Analysis Risk-on? Risk-off? Risk!


The latest COT positioning report published on Friday shows that the leveraged community keeps on its uncertainty regarding risk mode and global growth. With the upcoming FOMC and BoJ meetings later this week, speculative investors are still puzzled regarding the short term themes in the global markets. In FX, EUR bears keep on adding short positions, reversing more than half of the uptrend started at the beginning of the year. In the low-yielding currencies, JPY and CHF positions were little changed last week, following the massive sell-off we have experienced recently. In the Commodity Block - modest recovery in AUD, NZD and CAD positions. MXN long positions took a massive hit last week (reduction of nearly 50k contracts). In Metals, We continue to see mixed picture of positioning between Precious Metals and Industrial Metals. The downtrend of positioning in Precious Metals seems to have stalled (for now), while the sharp decline of positioning in Industrial Metals seems to continue. In US Rates, Treasury long positions in 2-years and 10-years notes keep on gathering momentum, as shown by the latest CFTC repot. The leveraged community added over 170k long contracts in UST notes (valuing at $27.7bn). The short end of the curve exhibits a somewhat puzzling picture, with positioning in Fed Funds declining and positioning in 3-month EuroDollar edging higher. In US Equities, Positioning in US equities continue to reflect a very bullish sentiment by the leveraged community. Positioning in S&P500 and Nasdaq100 keeps on trending up. Furthermore, investors keep on closing short VIX positions.

Foreign Exchange
Has the rally ended for EUR bulls? Friday's COT report shows that the leveraged community has become more bearish on the EUR, extending last week's short-EUR positioning. That being said, the commodity currencies enjoyed a slight recovery of speculative positioning (with the exception of MXN, which keeps on moving without any correlation to the rest of the currencies). Low yielding currencies (JPY and CHF) were little changed last week ahead of the FOMC and BoJ meetings. The leveraged community kept on adding short EUR positions, according to Friday's COT report, revering almost half way of uptrend that started at the beginning of the year. It seems like speculative positioning finally starts to pick up with the underlying driving factors (carry, credit spreads, etc..).

EUR IMM Speculative Positions


3 2 1 0 -1 -2 -3 -4 1.65 1.6 1.55 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15

EUR IMM Spec. Positions

EUR/USD Spot

Data Source: CFTC/Bloomberg

It is interesting to note that the case for EUR being a carry-trade currency keeps on being a main theme when it comes to positioning. If we look at the correlation between the Germany-US treasury rate differential and 1-month EUR/USD implied volatility, we can see that the declining rate diff. goes in tandem with the implied volatility. This may imply that we are likely to see the EUR/USD traded in a range for the coming months, unless rate diff. will start widening again.

EUR/USD Volatility and Rate Differential


1.4 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 30 25 20 15 10 5 0

Rate Diff/Vol Correlation (3-month rolling) EUR/USD 1-month Implied Vol

Germany-US Rate Diff (2s5s10s avg.)

GBP net speculative positions recovered previous week's decline, moving in tandem with the underlying positive sentiment in GBP (GBP has positioning has been moving up for the last couple of weeks). All in all, GBP seems to be perceived by the leveraged community as a relatively safe bet (in contrast to the EUR).

GBP IMM Speculative Positions


2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 1.97 1.87 1.77 1.67 1.57 1.47 1.37

GBP IMM Spec. Positions


Data Source: CFTC/Bloomberg

GBP/USD Spot.

In the low-yielding block, JPY and CHF long positions continue were little changed from previous week.

JPY and CHF IMM Speculative Positions


2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 0 -0.2 -0.4 -0.6 0.8 0.6 0.4 0.2

JPY IMM Spec. Positions


Data Source: CFTC/Bloomberg

CHF IMM Spec. Positions

It seems like investors are quite uncertain, ahead of the FOMC and BoJ meetings, and currently waiting on the sidelines to see the outcome of the two meetings. The one thing that strikes me as quite odd is the fact that speculative investors added a significant amount of long positions in UST, which tends to be highly correlated with moves in "safe-haven" positioning. This move, however, did not cause any move in JPY and CHF positions last week.
In the Commodity Block we saw some recovery of the AUD,NZD and CAD positions. Positions in commonwealth currencies rose to some extent. AUD recovered some of

the decline it suffered the previous week, while positioning in NZD keeps on being quite positive.

AUD and NZD IMM Speculative Positions


0.25 0.2 0.15 0.1 0.05 0 -0.05 0.6 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2

AUD IMM Spec. Positions

NZD IMM Spec. Positions

CAD positions keep on exhibit a bullish sentiment. The bullish CAD positioning is likely to continue following the hawkish rhetoric by the BoC and the possible rate hikes later this year (OIS futures price in 80% chance of 50bp hike by the end of 2012). In contrast to the bullish CAD positioning, down south, MXN positioning seems to be heading south. After benefiting from a period of relatively positive data from US, the MXN seems to suffer following the disappointment of the latest NFP and FOMC minutes.

CAD and MXN IMM Speculative Positions


3 1.75 1.25 0.75 0.25 -0.25 -0.75 2.5 2 1.5 1 0.5 0 -0.5 -1

CAD IMM Spec. Positions


Data Source: CFTC/Bloomberg

MXN IMM Spec. Positions

Metals
Friday's report shows that the leveraged community reduced its long positions in Industrial Metals significantly while did not reduce its positions in Precious Metals.

Gold and Silver IMM Speculative Positions


7 6 5 4 3 2 1 0 1.4 1.2 1 0.8 0.6 0.4 0.2 0

COMEX Gold Speculative Positions


Data Source: CFTC/Bloomberg

COMEX Silver Speculative Positions

Speculative positions in Industrial Metals continue to paint a very bearish, with a continuation of the downtrend of positioning in Platinum, Palladium and Copper.

Palladium and Platinum IMM Speculative Positions


0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Palladium IMM Spec. Positions

Platinum IMM Spec. Positions

Copper continue its downtrend of positioning (with a weekly drop of 9,000 speculative long contracts). The decline continues to be correlated with the overall weakness of the mining sector.

Copper (Grade A) IMM Speculative Positions


0.7 0.5 0.3 0.1 -0.1 -0.3 -0.5 -0.7 280 260 240 220 200 180 160 140 120 100 80

Copper (Grade A) IMM Spec. Positions

FTSE All-Share mining sector index

Data Source: CFTC/Bloomberg

US Rates
UST Bull Run continues. For the 2nd week in a row, the leveraged community added long UST positions (both in the 2-year and in the 10-year segments). Last week's report shows that the speculative positions in UST grew by nearly 170k contracts in total, valuing at $27.7bn. In total, the long speculative position in UST inclined by more than $48bn over the last two weeks.

UST 2-years and 10-years IMM Speculative Positions


5 4 3 2 1 0 -1 -2 -3 6 4 2 0 -2 -4 -6 -8

UST 2-years IMM Spec. Positions


Data Source: CFTC/Bloomberg

UST 10-years IMM Spec. Positions

Positioning at the short end of the curve continues to send mixed signals, with the downtrend in Fed Funds positions continues, while long positions in 3-month EuroDollar remained relatively unchanged.

Short-End IMM Speculative Positions


8 7 6 5 4 3 2 1 0 -1 -2 40 30 20 10 0 -10 -20 -30

Fed Funds IMM Spec. Positions

3-month EuroDollar Spec. Positions

US Equities
Friday's report shows that speculative long positions in US equity keep on edging higher, despite the downtrend in bullish positions in risk-correlated assets (such as UST yields, Industrial Metals and EM currencies).

US Equity Indices IMM Speculative Positions


8 6 4 2 0 -2 -4 -6 -8 0 -1 -2 -3 4 3 2 1

S&P500 IMM Spec. Positions


Data Source: CFTC/Bloomberg

Nasdaq100 IMM Spec. Positions

VIX speculative positions continue to incline (for the 4 th consecutive week), which can be seen as a somewhat measure of cautious by the leveraged community, as the main theme in global markets continues to be quite bearish.

VIX IMM Speculative Positions


0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 45 40 35 30 25 20 15 10

VIX IMM Spec. Positions


Data Source: CFTC/Bloomberg

VIX Spot

To conclude, the speculative positions continue to be very mixed ahead of the FOMC and BoJ. With no real catalyst for a major move, we continue to see relative weakness of positioning in growth-correlated assets and sideways moves of positioning in the FX market. Overall, speculative positions continue to be bullish (measuring as average %ile against 1-year back window), yet, we seem to be on a turning point.

Cross-Market Bullish IMM Positions


80.00 70.00 60.00 50.00 40.00 30.00 20.00

Bullish Speculative Positions