COT: Hedge funds buying expands from precious metals to copper and grains

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The main reasons why we focus primarily on the behavior of speculators, such as hedge funds and trend-following CTA's are:

• They are likely to have tight stops and no underlying exposure that is being hedged
• This makes them most reactive to changes in fundamental or technical price developments
• It provides views about major trends but also helps to decipher when a reversal is looming

Do note that this group tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.

Forex: 

Broad dollar weakness during the reporting period did not translate into broad selling from speculators, with buying of GBP (+12k to 70.5k), EUR (+8k to 74.4k) and not least JPY (+16.5k to -102.3k) being partly offset by selling of NZD, AUD and CAD. Overall, the gross dollar long against eight IMM forex futures fell by 55% to near neutral at USD 1.26 billion. In focus this week will be Tuesday’s Bank of Japan decision on whether to pivot away from negative rates, but gains in the yen could remain limited by dovish commentary and risks of a hawkish surprise by the Fed on Wednesday when the FOMC meets.

For the past three years, speculators have traded the yen with a short bias, culminating last month when the net short reached 133,000 contract (USD 11.3 billion) before two weeks of short covering lowered the net short to the current 102.3k contracts.