Quant View COT Report Analysis

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

30-April-2012

COT Report Analysis In the Fed We Trust (with no bulls in sight)

The latest COT positioning report published on Friday paints a mixed picture of speculative positioning across the different asset classes. The main takeout of the latest report is that the leveraged community, ahead of last Wednesday's FOMC meeting, closed almost all of the short UST positions. In other asset classes changes were relatively minor, as the leveraged community struggles to find any catalyst for a move in positioning. In FX, EUR bear trend of positioning seems to have stalled (or at least for now), with positions reverse some of the downward move we saw the last two weeks. In the lowyielding currencies, JPY and CHF positions continue to go nowhere, with a minor incline of 6,000 bullish contracts between JPY and CHF. In the Commodity Block AUD and NZD positions were little changed last week, while CAD positions continue to move higher (following the hawkish BoC statement and the expected rate hikes later this year). MXN positions continued to decline (as the report did not capture the price action following the recent Banxico rate decision). Perhaps the most interesting move in bullish positions was in GBP, which saw the sharpest incline in bullish positions between the G10 currencies. In Metals, No real change last week in positioning between Precious Metals and Industrial Metal. The downtrend of positioning in Precious Metals continues (although to a lesser extent than it was over the last two months). Industrial Metals continue to exhibit bearish trend of positioning. In US Rates, The leveraged community continued to position itself for a possible QE by the Fed, with a massive incline of positioning in UST 2-year. Positions in UST 10-years continued to incline, but to a lesser extent. At the short-end of the curve we saw little change in positions, with the Fed Fund and 3-month EuroDollar positions inclining slightly. In US Equities, Speculative positions in US Equities were little changed last week, ahead of the FOMC meeting on Wednesday (as the report captured the change in positioning for the week ending on 24-April). VIX speculative positions declined slightly last week, after the recent uptrend.

Foreign Exchange
Which currency is the "Star" of the G10? Friday's COT report shows that the leveraged community continues to position itself for a bullish trend in CAD and GBP. While EUR positions were little changed last week, GBP positions moved up significantly (toward the 88%ile of the last 1-year). CAD continues to be the shining start of the commodity-bloc, following the recent flow of positive data from Canada and the hawkish BoC statement (the OIS futures price in a 60% chance of a hike within 6-months and a 60% chance of 50bp hike by the end of the year). With the dynamic in G10 changing from focus on EUR, AUD and JPY toward the less liquid currencies, it is interesting to examine the current heat map of the G10 space. To find outperformer in G10 we shall examine the positioning ranking and the Trade-Weighted Index of each currency. As an arbitrary scale we shall look at the %ile of the most figures against 1-year window.

10

Rank - Trade Weighted Index 6 4

0 0

GBP CAD NZD AUD USD CHF MXN JPY EUR

1 Rank - IMM Spec. Positions 2 3 4 5 6 7 8 9 10

As we can see, GBP and CAD are rank at the top of the currency space, while EUR and low-yielding currencies rank at the bottom. EUR positions were little changed last week, as shown in Friday's COT report, after a two weeks' decline, which reversed more than half of the uptrend since the beginning of the year.

Data Source: CFTC/Bloomberg

As one can see, the price action of the EUR/USD keeps on diverging from the IMM positions. Although CFTC positions are only a fraction of the entire scope of positions, it is usually a good proxy for the market position. The fact that the price action has yet to pick up with CFTC positioning, perhaps, backs up the theory that the EUR slowly becomes a funding currency, and therefore decouples from risk sentiment. With no real developments from EU (neither positive nor negative) EUR/USD is likely to stay range-bounding.

GBP net speculative positions continued to grind higher toward 1-year high, as the leveraged community continues to put bullish GBP bets. As mentioned previously, GBP becomes the new "star" (or at least for now) of the G10 space.

Data Source: CFTC/Bloomberg

In the low-yielding block, JPY and CHF long positions continue to be little changed from previous weeks.

JPY and CHF IMM Speculative Positions

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

JPY IMM Spec. Positions

Data Source: CFTC/Bloomberg

CHF IMM Spec. Positions

As the report does not capture the change of positioning following the FOMC and BoJ meetings, it will be interesting to see how the leveraged community reacted to

the mixed signals sent by FOMC regarding the outlooks for the US economy and possible QE.
In the Commodity Block the commonwealth currencies continue to move sidelines in term of positioning, with no developments from china or RBA/RBNZ monetary policies.

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 speculative positions continue to trend upward on the back of hawkish statement by the BoC, which was perceived as a case for rate hike later this year. OIS future now price in a 50% chance of hike within 6-months (from 30% before the BoC meeting) and 60% chance of rate hike within 1-year (from 40% before the BoC meeting).

CAD IMM Speculative Positions

2.5 2 1.5 1 0.5 0 -0.5 -1 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2

CAD IMM Spec. Positions

Data Source: CFTC/Bloomberg

CAD 1-year OIS Swap

MXN positions continued to decline (ahead of the Banxico rate decision), as the leveraged community started to price in a rate cut (which turned out to be wrong,

as the o/n rate was left unchanged). All in all, the uptrend in speculative long positions in MXN continues to be intact.

MXN IMM Speculative Positions

3 2.5 2 1.5 1 0.5 0 -0.5 -1 13.9 14.9 11.9 12.9 9.9 10.9

MXN IMM Spec. Positions

USD/MXN Spot (Inverse)

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 Spec. Positions

Data Source: CFTC/Bloomberg

COMEX Silver Spec. Positions

It is interesting to note that the price action of the Precious Metals continues to diverge from the move of speculative positions. Looking at %ile basis, we can see that the Precious Metals basket (equally weighted Gold & Silver basket) is overvalued compared to the speculative positions (given the same look-back window of 1-year).

Precious Metals Basket and Positions

100 80 60 40 20 0

PM Basket (50/50 Gold/Silver) - %ile (against 1-year window) PM Basket Spec. Positions - %ile (against 1-year window)

In the Industrial Metals speculative positions continue to trend down (despite some reversion of Palladium positions)

It is interesting to note that the price action of Platinum/Palladium basket (50/50 weights) tracks closely the trend of speculative positioning.

Industrial Metals Basket and Positions

100 80 60 40 20 0

Platinum & Palladium Basket. (%ile vs. 1-year window) Platinum/Palladium IMM Positions (Avg. %ile vs. 1-year window)

Copper positions continue to decline, although to a lesser extent. The move continues to exhibit great correlation with the price action of the global mining sector (tracked by FTSE All-Shares mining sector index).

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
Friday's report shows a continuation of the bull trend in UST 2-years and 10-years. The latest bull trend in UST seems to be continuing with full force, with an incline of 140K contracts from the previous week. UST 10-years positions moved up, however the move was relatively minor.

UST 2-years and 10-years IMM Speculative Positions

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

UST 2-years IMM Spec. Positions

Data Source: CFTC/Bloomberg

UST 10-years IMM Spec. Positions

Short-End of the curve continue to move nowhere with the 3-month EuroDollar positions consolidating around 0 and Fed Funds futures reversing some of the downward move of previous weeks.

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 the uptrend of speculative positions in US equities continues, despite losing some momentum over the recent weeks. Nasdaq100 and S&P500 positions declined slightly last week, however, these declines seem relatively minor when looking at the large trend.

US Equity Indices IMM Speculative Positions

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

S&P500 IMM Spec. Positions

Data Source: CFTC/Bloomberg

Nasdaq100 IMM Spec. Positions

VIX speculative positions reversed some of the uptrend of previous weeks, which may signal that the leveraged community expects lower volatility in the short term

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, as the market lack a game-changing event, positioning continues to move sidelines. Last week did not capture the change of positioning post FOMC/BoJ and Banxico rate decisions, so it will be interesting to see how the leveraged community reacted to these events. The next report will probably provide clearer picture about positioning in US rates and "safe-haven" currencies, as well as Metals, after the Fed did not provide the market fresh hopes for further monetary easing. If we look at the extremeness of long risk-correlated positions, we can see that the uptrend we saw at the beginning of the year has lost some momentum (with the flow of negative data). However, the leveraged community is still positioned for a risk-rally.

Risk-Correlated Bullish Positions

80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 3000 5000 4000 7000 6000 8000

Risk-Correlated Spec. Positions (%ile vs. 1-year window)

DAX Index

Good Luck, Harel Jacobson.