Quant View COT Report AnalysisHarel Jacobson, FRM (Harel@Barak-Capital.co.il)

30-March-2012

COT Report Analysis A Show about NothingThe latest COT positioning report published on Friday bears no new developments regarding positioning in the different asset classes, with the exception of UST positioning, which continues to be extremely bearish. Positioning was majorly unchanged across all markets, perhaps due no new developments in the macro space. In FX, The ongoing trend in EUR positioning seems to have stalled last week, as the positioning was overall unchanged. In the Commodity Block, the commonwealth currencies' downtrend in positioning seems to have taken a breath, for now, with positioning going sidelines last week. CAD long positioning was reduced last week, although the reduction in long positioning seems to be minor. In EM, As usual, the MXN keeps on being the most interesting (and most volatile) currency, with a staggering incline of long positions by the leveraged community (a move of 120,000 contracts, equivalent to appx. $4.7 billion) In Metals, The downtrend in Precious Metals seems to have stalled as well, with Gold reversing some of the decline in positioning, Silver positions, on the other end, seem to continue the downtrend. Industrial metals were little changed last week; however, there seems to be some weakness in the upward trend in the industrial metals (especially in Copper). In US Rates, The leveraged community continued to unwind long UST positioning across the curve. UST 2-years positioning is currently the lowest it has been for the last 4-years, while the UST 10-years positioning moving toward its lows as well. At the short end of the yield curve (Fed Funds contracts and 3-month EuroDollar) positioning was largely flat last week. In US Equities, The uptrend in S&P500 and Nasdaq100 positioning seems to have stalled as well (moving in tandem with positioning in other asset classes). S&P500 positioning recouped some of the decline it had suffered the previous week, while Nasdaq100 positioning continued its decline (although it was little changed from previous week). Very interesting development we can see in VIX positioning, with investors turn very bullish on risk (bearish on VIX).

Foreign ExchangeNo news is good news? Friday's report shows that positioning was overall unchanged in FX, with the exception of JPY and MXN, which moved significantly toward the extremes. EUR positioning was little changed last week, after a long uptrend since the beginning of Dec-2011. It seems like the trend is lacking the momentum it had two months ago, and it's possible that positioning will likely to be moving sidelines in the coming weeks (unless we have some market-moving event that will provide the fast-money investors reason to change their positioning).

EUR IMM Speculative Positions3 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. PositionsData Source: CFTC/Bloomberg

EUR/USD Spot

Looking at the EUR/USD carry (the interest rate differential between the Germany 2s5s10s and their US peers) reveals that the correlation between rate diff. and positioning continues to decline, furthermore, the correlation between the 1month Risk Reversal (normalized to the ATM vol level) and EUR positioning continues to decline, hence, speculative positioning in EUR/USD is not driven by the either carry nor OTC positioning factors. This is an interesting development that should be watched, as it seems like the Euro starts to decouple from long lasting driving factors, and perhaps the market begins to perceive the Euro as a funding currency.

Correlation between EUR Positions and different factors1.0000 0.8000 0.6000 0.4000 0.2000 -0.2000 -0.4000 -0.6000 -0.8000

3-month EUR IMM Spec. Positions/ Risk Revesal (Normalized) Correlation 3-month EUR IMM Spec. Positions/Rate Diff Correlation

I rarely mention the other European currency, the Sterling, but it might worth noticing that the GBP begins to form a trend in positioning. After a relatively sideways action in IMM Spec positions, the leveraged community starts to put on more long GBP positions.

GBP IMM Spec Positions.1.5 1 0.5 0 -0.5 -1 -1.5 -2 2.05 1.95 1.85 1.75 1.65 1.55 1.45 1.35

GBP IMM Spec. PositionsData Source: CFTC/Bloomberg

GBP/USD Spot

In the low-yielding block, we continue to see decline of JPY positions (falling further into negative territory, making positioning the worst it has been for the last four years). CHF positions were largely unchanged last week.

CHF and JPY IMM Speculative Positions2 1.5 1 0.5 0 -0.5 -1 -1.5 -2 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6

JPY IMM Spec. PositionsData Source: CFTC/Bloomberg

CHF IMM Spec. Positions

The Commodity Block was little changed, with the exception of MXN positions. The commonwealth currencies (AUD and NZD) stalled after previous week's sharp decline. With no new developments in the marco space regarding China growth (and global growth), the positioning in AUD and NZD is likely to move sideways.

AUD and NZD Spec. Positions0.25 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. PositionsData Source: CFTC/Bloomberg

NZD IMM Spec. Positions

The CAD and MXN continue the uptrend of US growth-correlated assets. The MXN reversed previous week's entire decline (increasing net speculative positions by 120,000 contracts, equivalent of $4.7 billion). CAD positions were little changed; however, the uptrend started at the beginning of the year is still intact.

CAD and MXN IMM Spec. Positions2.5 2 1.5 1 0.5 0 -0.5 -1 3 2.5 2 1.5 1 0.5 0 -0.5 -1

CAD IMM Spec. PositionsData Source: CFTC/Bloomberg

MXN IMM Spec. Positions

It is interesting to continue watching the performance of the US growth-correlated currencies relative to the rest of the high-yielding currencies (that are more correlated to either global growth or China/Europe growth). As the market tends to miss-concept beta with correlation, the idiosyncratic risk of the different highyielding currencies tends to be largely ignored.

MetalsFridays' report shows that the sharp downtrend in long Gold and Silver positions has stalled for now; however, the long-term trend seems to be quite bearish on Precious Metals. Looking at the positioning in Gold from a technical perspective, it seems like the trend encountered a strong resistance and was unable to sustain a break above the long term trend.

Gold and Silver IMM Spec. Positions1.4 1.2 1 0.8 0.6 0.4 0.2 0 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Comex Gold IMM Spec. Positions

Comex Silver IMM Spec. Positions

We continue to see extremely high correlation between the change in DXY positions and Gold/Silver positions. Furthermore, the correlation between UST change in UST positions and Gold positions continues to grind higher, implying that the relative weakness in Gold and Silver is related to the uptick in US yields and USD strength; however, the underlying price action has yet to follow the uptrend in correlation.

Gold Correlation with UST and DXY Positions0.8 0.6 0.4 0.2 0 -0.2 -0.4 950 850 750 650 550 450 350

20-weeks Gold/UST Positions correlation 20-weeks Gold/DXY Positions correlation (Inverse) Precious Metals Basket (50/50 weights) Data Source: CFTC/Bloomberg

With the FOMC minutes upcoming later in April, it is interesting to follow the rhetoric and the implication on UST yields and inflation expectations. While there are growing expectations of another round of QE by the Federal Reserve, any disappointment is likely to boost the DXY and affect the holding in Precious Metals. In the Industrial Metals there seems to be some weakness in positioning. The uptrend that began during Dec-2011 seems to have stalled for now (in Copper) or reverse (in Platinum and Palladium).

Platinum and Palladium IMM Spec. Positions0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

Platinum IMM Spec. Positions

Palladium IMM Spec. Positions

This is, perhaps, driven by the growing concerns regarding global growth and industrial expansion. It is interesting to look at the close relationship between the speculative positions in Copper and the mining companies (using FSTE mining companies' index). It seems like the Copper spec. positions tend to indicate the direction of the index, and both are signaling right now a pause of the uptrend started at the end of last year.

Copper IMM Speculative Positions0.7 0.5 0.3 0.1 -0.1 -0.3 -0.5 -0.7 80 180 130 280 230

Copper (Grade A) IMM Spec. Positions

FTSE All-shares mining index

Data Source: CFTC/Bloomberg

US RatesThe only way is down? The sharp reduction of UST positioning continues with full force, so it seems. Friday's report shows that the leveraged community continued to reduce long UST positioning, which is now approaching "oversold" territory (about 2 Stdev. From the last four-years' mean). Positioning in UST 2-years suffered the vast majority of the reduction, while the UST 10-years positions were reduced, but to a lesser extent.

UST 2-years & 10-years IMM Speculative Positions5 4 3 2 1 0 -1 -2 6 4 2 0 -2 -4 -6 -8

UST 2-years IMM Spec. PositionsData Source: CFTC/Bloomberg

UST 10-years IMM Spec. Positions

At the short end of the curve we have seen no major developments, with the 3month EuroDollar positioning reversing some of the decline it had suffered the previous week. Fed Funds contracts are currently flat, which makes sense given that the Fed target rate is currently 0-0.25 and is likely to stay at these levels throughout 2014.

Short-End IMM Spec. Positions30 25 20 15 10 5 0 -5 -10 -15 -20 8 7 6 5 4 3 2 1 0 -1

3-month EuroDollar Spec. Positions

Fed Funds IMM Spec. Positions

US EquitiesFriday's report shows that Speculative positions in US equities were little changed last week. While S&P500 positions recovered slightly from previous week's drop, Nasdaq100 positions continued to decline further, reversing the entire upward trend in positioning of the last two month

Data Source: CFTC/Bloomberg

Looking at the VIX speculative positions, it seems like investors are less worried about setback in equity space, as long positions in VIX continues to decline.

VIX IMM Speculative Positions0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7

VIX IMM Spec. Positions

To conclude, Friday's report sends somewhat mixed signals regarding the positioning of the leveraged community. With FX positioning moving sidelines (with the exception of USD positions against low-yielding currencies and MXN), and positioning in growth-correlated assets declining (Industrial Metals and equities), we seem to be in no-man's-land and a lacking the factors to build a long lasting trend in positioning.

Good Luck, Harel Jacobson