Prepared by Jack McIntyre

Latest MCM TradeWatch COT data analysis, a review of currency futures positions as of Tuesday, October 21st, shows that coming into this week, large traders (hedge fund types who have no exposure to the cash FX markets) have maintained a bearish posture on the major currency contracts. In fact, this group had a net short position in the yen, D-mark, British Pound, Canadian Dollar and Australian Dollar. The only major currency where they had a net long was in the Swiss Franc and that was only 1,646 contracts. We said had these net positions because we are sure that the price action over the last trading session has dramatically altered their exposure to the FX futures market.

We went back and looked at what the dollar did during the October 1987 time period and it was not a good time to be long dollars. Granted, you had a Fed injecting massive liquidity into the financial system which hurt the interest rate differentials, but it turned out that the dollar was not a true safe haven currency. Therefore, during this period of global equity market instability we look for the dollar to continue to come under pressure. We are not drawing exact parallels between what is currently unfolding and October 1987, but there are certainly some similarities between then and now (e.g., market perception was for the Fed to continue to raise interest rates through the rest of the year and the Fed was in a more restrictive monetary policy in 1987).

We continue to like the prospects for the British Pound and would be aggressive buyers of it on weakness. During this latest round of turmoil on the global equity markets we feel as though hedge funds and global investors are going to channel funds into the front-end of the U.K. coupon curve or into the short Sterling strip. This is because of the still high interest rates attached to shorter maturity instruments in the U.K. For instance, the 2-year Gilts yields 6.88%, which puts it as the highest 2-year yield out of the G-7 nations. Moreover, it is probably safe to say that no central bank is going to raise rates anytime soon in this type of atmosphere and the U.K. MPC can be included in this group. Therefore, as funds are channeled into the U.K. front-end they must first buy the British Pound, even at these levels. And one thing to note is that coming into this week, not only was the hedge fund community position short in the pound contract, but so to was the commercial hedging crowd who had a net short of 9,443 contracts. Therefore, you go two of the major players in the currency market short the pound contract. We guarantee you that both these groups are feeling some heat given the sharp rally in this contract over the last several trading sessions. Moreover conservative accounts may want to look at call spreads on the December British Pound contract at the IMM. This is simply due to the marked increase in actual volatility in the FX markets and this way you can be more patient with the position. Additionally, it has a build in stop (the cost of the call spread is the maximum loss). We like the December 167/171 call spread for 226 points or better. There are 38 days until expiration.

October 29, 1997MCM, Inc.

294 Washington St, Ste. 734, Boston, Massachusetts

Financial Commentary

THE ALLENDALE ADVISORY REPORT | ASTRO-TREND | SPRING OUTLOOK
COMMODITY FUTURES FORECAST WEEKLY REPORT
THE OPTION ADVISOR
COMMITMENT OF TRADERS ANALYSIS-CURRENCY CONTRACTS
MYERS ON FUTURES | NIKKO MARKET COMMENTS | NIKKO MARKET COMMENTS
SORTING IT ALL OUT | INTEREST RATE WATCH | FINANCING AND THE “NEW” CANADA
U.S. TREASURY BOND TECHNICAL ANALYSIS
ITALY: WILL MARKET OPTIMISM BE REWARDED
SEEING THROUGH THE ILLUSIONS IN STRUCTURED FINANCE
EL NINO OUTLOOK | THE REAPER MARKET COMMENTS | WEEKLY OUTLOOK
YOU SHOULD BE FULLY INVESTED FOR THE NOVEMBER-DECEMBER-JANUARY RALLY

Consensus National Futures and Financial On Line Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

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