wmeubank@ocp.kcmo.com
LATEST COMMITMENT OF TRADERS
ANALYSIS–CURRENCY CONTRACTS
Prepared by Jack McIntyre
Strategy
Buy OTM January call options on the March 1998 yen contract. This is a high-risk, highly-leveraged trade. However, the risk is defined and the upside is significant given the way the FX market is currently positioned in the yen contract (or $/yen).
Summary
Latest MCM TradeWatch COT data analysis, a review of currency futures positions as of Tuesday, December 2nd, shows that large traders are leaning aggressively towards being short the yen contract.
There has been no doubt that the yen has experienced one of its most dramatic sell-offs of the past couple of months and being long $/yen or short the yen contract has been the right trade. This is why according to the latest COT data, large traders (who have no exposure to the spot FX market) are currently holding a record-net short position in the yen contract. In fact, this group of traders has been adding to their net short position since October 21st when $/yen was trading near 120.90. Along this same line of thought, the large traders have been holding a net short position in the yen contract since July 15th of this year. Yes, this has been the right trade since $/yen was trading near 115 back then. Just because large traders are currently holding a record-net short position in the yen contract in and of itself is not a bullish sign. After all, the yen contract is trending bearishly. However, it is a case of a potential strong rally in the yen contract unfolding if a major support level fails in $/yen or resistance level gives way in the yen contract. Granted, it may only be a correction move within a large bearish trend, but the move should be in the magnitude of 3 to 4 “big figures.” We would view weakness in $/yen as a “go with” trade.
Another thing to keep in mind is that the FX market is not positioned for a stronger yen going into the release of today's details of the LDP's latest fiscal stimulus package. The credibility of this package may just catch the FX market off guard which is why we favor being long January OTM yen calls. View this as a “lottery” type trade in that you'll know right away whether it will work out or now. These options are not inexpensive, but do not reflect the possibility that a huge move could unfold to the upside.
We are spending more time on the large traders' positions because this group of traders is typically more sensitive to market swings in terms of position adjustments. In addition, they and are often market timers utilizing technical studies.
December 11, 1997MCM, Inc.
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