Commitment of Traders and Other Flows

Confounding expectations, the net speculative short euro position grew over the week to January 24, despite the single currency's three cent advance.   The net speculative short position at the IMM reached a new record of 171.3k contracts.  Thus far over the course of the month, the net short position has grown by 44k contracts, a little more than last month.  

Since January 24, the euro has rallied another three cents, arguably encouraged by the stabilization of the PMI readings (though forward looking new orders measures are still worrisome) and the Federal Reserve statement, pushing out expectations for the first tightening.

In the post last week that looked at the Commitment of Traders report for the currency futures we reminded investors that when trading futures one has to declare whether one is commercial (has underlying business exposures) or a non-commercial (which is widely recognized as speculators).  We leave the issue of the non-reported positions for another post.  

In addition to the distinction of commercials and specs, we want to draw your attention to the disaggregated data.  The net speculative euro position increased, but the speculative longs increased, just not as much as the speculative shorts.  This indicates that at least some speculative players have begun turning their boats (portfolios around) by playing the euro from the long side.  Commercial accounts expanded their net long euro position as a function of the longs adding and the shorts paring exposures.  

Net short speculative positions in sterling were trimmed by less than 1000 contracts.  This was a reflection of both longs and short being reduced.  Since early October 2011, the net speculative short sterling futures position has been cut in half.  Meanwhile, commercials cut their long positions and while shorts added.  

In the spot market, the dollar tested its 200-day moving average against the yen on January 25th (the day after the end of the reporting period) and approached its best level in three months.  The net speculative long yen positions were cut 14.5k contracts to roughly 44.5k.  This was the result of longs being trimmed by about 12.2k to 66.2k and short adding 2.4k contracts to 21.8k.  The net long positions is still at the upper end of the 3-year range.  Commercial accounts add to longs and cut short positions.  

The fact that the dollar sold off aggressively in the spot market may have encouraged speculators to extend long positions.  With the euro trading at its best level in about a month against the yen, Japanese official jawboning has quieted and the risk of intervention likewise lessened.  

The Australian dollar is also interesting.  The net speculative long position grew by almost 16k to 69.4k contracts.  The longs expanded and the shorts were cut by roughly the same amount.  The net speculative position in the largest  since early August.  Recall that at the end of September, the net long had been trimmed to a little more than 5k.  The Australian dollar has rallied more than 10% since then and that rally has come despite rate cuts by the central bank and anticipation of additional cuts.  Commercials cut longs and increased shorts.   

In the spot market the Canadian dollar was near its best level in three months on January 24th and subsequently has traded below parity against the greenback.  However, the net speculative position at the IMM is still short Canadian dollar futures.  Still, the shorts were trimmed and the long, leaving the next position short about 18.9k, a decline of almost 10k contracts.  The speculative market has not been net long Canadian dollars since early September.  Commercial accounts cut long positions and added slightly to shorts.  

Lastly, note that the net speculative position in Mexican peso futures reversed, and for the first time since early September, it is net long peso futures.  The longs increased by about 50% to 36.5k contracts,while the shorts were cut by about a third to about 29k contracts.  The Mexican peso has appreciated almost 8% thus far this year.   That net spec short position rode out at least a 5% appreciation of the peso before switching. 

While the peso has scope to appreciate further, the near-term risk is for consolidation.  Given its big move and streak--losing only three days so far this month--the market seems vulnerable.  In addition to technical factors a disappointing US auto sales report and/or employment report could spur a setback for the peso longs, though provide a new opportunity for new bulls to enter.   Commercial accounts trimmed long positions slightly while adding strongly to shorts.  

Other Flows

Brazil:  Foreign investors have poured back into the Brazilian equity market since the start of the year.  In the first three weeks of January, foreign investors have bought BRL5.3 bln, which could very well end up surpassing the BRL6.1 bln that came in May 2009.  The Bovespa is up almost 11% through January 27, recouping a good chunk of the 18% decline seen last year.   

More foreign interest is expected as the six month IPO drought is soon to end with two new offerings--a Brazilian unit of a Norwegian oil and gas company and a tourist company are expected to each seek around BRL1.2-1.4 bln.  Foreign investors have also bought an estimated $4.8 bln of Brazilian bonds this year.  The real itself has rallied about 7.5% against the this year, trailing slightly behind Mexico to lead the region.  

India:  India's rupee has appreciated for four consecutive weeks to reach an eleven week high. This is the longest streak since last April.  The rupee has gained about 7.5% against the dollar,the same as BRL. The rupee is recovering from a slide in August through mid-December that saw it lose about a quarter of its value. What looks to be the best month in decades for the currency needs to be placed in this larger context.  The recovery of the currency has allowed the central bank to ease a bit through cutting required reserves (January 24).  

The Sensex 30 benchmark fell a little more than 21% last year.  It has recovered a little more than half of that here in January.  Foreign investors have bought about $1.5 bln of Indian shares, which is about 3-times more than acquired in the same period last year.  According to the exchange data via Bloomberg, foreign investors have sold Indian shares on only one day this year, January 2nd.  

Foreign interest in India may in some respects be part of a larger move back into Asia.  Foreign investors have already bought $4.9 bln of South Korean shares, 3.1x more than the year ago period.  Although the equity flows into the Philippines and Indonesia are considerably less ($375 mln and $363 mln respectively), bot represent a significant increase over last January (6.5x and 2.3x respectively).  Taiwan is an exception.  Although it has seen foreign investors buy $1 bln of local shares, this represents a sharp fall (~95%) from a year ago.   

Perhaps the near-term key lies with how China's Shanghai Composite does when it re-opens after the lunar new year.  The Shanghai Composite lost nearly a quarter of its value last year.  It has started this year off on better footing, with a 5% gain earlier this month.  Partly this may be a function of the central bank gratifying market expectations with some easing in monetary policy (e.g. cut in required reserves) and the ability of the bulls to push the index above the 7-month downtrend (at month end 2340; closed January 20th near 2319) and the global investment environment.