A Record net short in Eurodollar futures

By Mark Melin 

With the Ten Year US Treasury note touching the lower end of the “Trump election” range at 2.31%, a Deutsche Bank report analyzing Commodity Futures Trading Commission’s Commitment of Traders (COT) report shows speculative interests positioned for a move in the opposite direction. While interest rates were important — particularly given a weak US jobs report Friday — these same “specs” decreased their short exposures in the euro currency – especially Eurodollar futures– ahead of interesting electoral developments in the region.

Eurodollar futures – Certain professional traders caught on the wrong side of a bad US jobs number

It has been three weeks running that professional commodity futures speculators have reduced their net short exposure to the US Ten Year note, Deutsche Bank’s Dominic Konstam, Alex Li, Daniel Sorid and Steven Zeng point out. Spec net positions were lightened up by 192,000, last week, while adding to their record net shorts in Eurodollar futures. ValueWalk previously reported how various institutional research services were advising a position reversal in the trade.

In Eurodollar futures the record net short position, with an additional 47,000 contracts added on the week, now represents 25% of the total open interest in the market.

While it is difficult if not impossible to extrapolate individual speculator’s exact portfolio positioning from the report, as a whole there seems to be a relative value opinion emerging on long-term interest rates in the US relative to short-term rates in Europe.

With headline inflation expected to rise in Europe – and the European Central Bank potentially looking to pull interest rates out of the gutter as US rate hikes appear on an aggressive path – there is a more aggressive path identified in the US. This comes even after the surprisingly negative March jobs numbers.

With only 98,000 new jobs created – and retail jobs being shed as the Amazon effect looms over brick and mortar – at least certain categories are improving. Those working as waiters and bartenders — serving those with high-paying jobs — grew in number while the job category of “Doormen” equally found favor in the new world economy, ZeroHedge first observed. Manufacturing witnessed job declines while “Professional and Business Services” employment nearly doubled from 27,100 to 45,500 jobs added.

Amid all this economic data which drives interest rates and currency prices, various trading categories monitored by the CFTC had vastly different opinions, judging by their positioning.

Differentials in EU / US positioning evident from COT report

Breaking down the US Treasury exposure positioning, different strategies and outlooks among market participants become evident.

Dealers, those most often with a noncorrelated strategy to the market, generally remained neutral over the week from March 13 to 17. Asset managers significantly added to their Eurodollar and Treasury exposure after an undecided price pattern that reverted to the flat level in the middle of the week. Leveraged funds, however, looked at the middle of the week as a selling opportunity, going from near flat on Wednesday to end the week at a strong negative exposure of -$213 billion.

Speculative traders, who had been short the Japanese yen as well as euro currency, are beginning to lighten up on this positions, lightening up on their shorts by 14,000 and 12,000 contracts respectively. Relative to the US dollar, the yen has been in a steady downtrend since the new year, which follows a noticeable if statistically unusual spike from November 4, bottoming at 102.57, to December 16, when the short-term trend topped out near 117.81. The euro trend meanwhile appeared to have near a 75% negative correlation to the yen. The euro downtrend started earlier from a peak of 113.49 on August 19, significantly picking up momentum after November 8 US election. While their trends started at different points, both bottomed on a short term basis near December 19 as the low of 104.05 has held on a short-term basis.

The sentiment in the currency markets is juxtaposed to a bullish stock market outlook. In equities, the speculators purchased a net long exposure of 72,000 S&P 500 E-mini futures.