Summary: Another strong push by the Aussie bulls to take the net Spec long Aussie positions to a fresh all-time high after last weeks all-time high.

Australian Dollar

A huge surge in net long positions last week in the Aussie rising 11,147 to 103,376 – this 12% move in one week is absolutely huge and drives the AUD longs to a fresh all time high. Certainly it signals a warning that further gains will be hard fought particularly if the S&P starts to fall further into year end but in and of itself it is not cause for panic or alarm given the changed nature of perceptions toward the Aussie dollar – these days its the shorts that are at most risk from constantly bullish sentiment which is very different from the first 27 and a half years of the Aussie dollar’s now 29 year float.

Speaking of shorts there is a misnomer flying around the blog sphere today that I have to address – that is some people are saying that the AUD’s rally is on the back of short capitulation. Perhaps it is in the physical market, perhaps it is in the small subset that the writer surveyed but it is not reflected in the CFTC data that I look at as my proxy for leveraged or speculative positioning.

One of the really cool things about trading futures is that you can use two non-price tools to help you know what is driving the market – volume and open interest. Volume is what volume is but open interest is the net of the fresh longs, fresh shorts and closed out positions. It is a powerful tool in telling us what’s going on.

Say for example price rises on strong volume but open interest falls – that’s probably short covering. If on the other hand prices rose but open interest rises then this is fresh positioning. There are many and varied nuances but that is essentially the main one.

So when I was asked a few times about the short covering induced rally I said I thought it was probably not true because open interest had risen 46,500 contracts or roughly 20% in the past month. When I checked out the actual Levered positions over the past month this was confirmed with the CFTC’s release from last Friday showing that longs have increased from 100k to almost 137k while shorts for leveraged accounts have only fallen from 59k to 57.8k via 65k on the way.

So I would be thinking this is fresh longs coming into the market and the AUD has very stretched positioning when looked at historically.

EURO

The EURO shorts fell another 1,172 last week to sit at the lowest level of shorts in more than 12 months. This recent range break in terms of the structural net short Euro position is very interesting in context of the set up for 2013. Certainly it says that there is plenty of room, or put another way – available limits, for levered traders to get short Euro but it also speaks of a market that seems to be taking a Euro implosion off the table.

I hadn’t thought of that till I was writing so the hurdle rate for US dollar strength might be recalibrating higher. EURUSD trade above 1.3170/90 would open the way for a 4-5 big figure move and positioning would support that.

Yen

Another 4,075 Yen contracts short and another 5+ year high in Yen shorts to 94,401. Like the Aussie this is getting a crowded trade by historical standards but the recent emergence of a USDJPY uptrend would have to reverse to impact positioning materially.

The 200 week moving average comes in at 85.10 and this would be seen as a big level if it gives way.

GBP

A small increase in GBP longs last week of 684 to 27,954 which is close to the upper limit of the past 6 and 12 months but like other contracts and currencies. GBP would need to break 1.6310 to kick positioning and the GBPUSD into a new range.

NZD

Last week’s increase of 3,512 in net longs to 24,600 in the context of the size of the NZD contract is a pretty strong indication of why AUDNZD went down last week. This positioning in the Kiwi is the longest the market has been in over 12 months so once again there are risks from positioning here.

CAD

5,462 longs were added to the net long positions of the large speculative community last week in the Canadian dollar bringing net longs to 62,533. This is nowhere near the extreme of the past 6 or 12 months – so there remains plenty of positioning ammunition should the US dollar weaken materially or buying for the Commonwealth Commodity bloc continue.

WHY WE LOOK AT CFTC COMMITMENT OF TRADERS POSITIONING

FX markets are made up of many different players. One of the most influential are traders and speculators but because of the OTC nature of FX markets it is difficult to get a good read on exactly what the “speculators” are doing in the market.

But we can do that by proxy using the CFTC’s Commitment of Traders report that they release at 3.30 pm each Friday afternoon.

Certainly Futures traders are but a tiny part of the almost 5 trillion dollars of FX turnover each day but they remain a very good bellwether for what positioning might look like in some currency pairs. In some pairs like the EURUSD watching the large speculators is a very good proxy for the underlying EUR rate – while in others the relationship is less strong.

What we know though is that watching this sector of the market is an important part of any traders toolkit of indicators for assessing the direction of a pair both short and long term.