Prepared by Jack McIntyre

Based on the COT positions, we like buying volatility in the yen contract or OTM call options.

Based on the COT positions, buy the Australian Dollar contract and sell the Canadian Dollar contract. We would use a one to one ratio.

Latest MCM TradeWatch COT data analysis, a review of currency futures positions as of Tuesday, October 7th, shows that large traders continue to be aggressive sellers of the yen contract. Meanwhile, they have been much better buyers of the D-mark and Swiss Franc and Canadian Dollar contracts and are currently holding net longs (in the case of both the Canadian Dollar and Swiss Franc contract they are at three-month extremes).

If you were to look at nothing other than the large traders current positions in the IMM currency contracts, it looks like the yen should outperform most of the other major contracts. This is due to the fact that the large traders (who are typically your hedge fund types) have been adding to their net short position. At a net short of 33,002 contracts they have their largest net short since April 29th, when they were short 35,863 contracts. If you go back and look at a continuous chart on the contract you'll notice that this was only three days before the contract established a low for the year at 78.94. Large traders don't have a great track record in timing the yen contract this year and therefore, we would be very cautious in selling the yen contract at these levels. We will point out the fact that large traders can maintain these large short positions for quiet some time. This means that the ensuing correction in the yen may not happen today or tomorrow, but that when the contract does rally (or when dollar/yen breaks lower), these shorts should come under some pressure to cover. You may not see this until multiple closes below 120.00 in dollar/yen. At a minimum, you may want to consider buying volatility as the current trading range in dollar/yen (120/123) should not last too much long based on the way the hedge fund community is positioned in the underlying yen contract.

One trade idea you may want to look at based on the latest COT data involves buying the Australian Dollar contract and selling the Canadian Dollar contract. It is a position trade in that the large traders have their largest net long in the Canadian Dollar contract (10,291 contracts) since December 3rd of last year (14,976 contracts). However, this same group continues to have a fairly significant short exposure to the Australian Dollar contract and is only 1,094 contracts off their all time record net short of 8,868 contracts from Sept 23rd of this year. It seems as though this divergence in positions cannot last that long and therefore, the Canadian Dollar should come under selling pressure while buyers are expected to dominate the price action in the Australian Dollar. Over the past six months there just is not any sign of a correlation between these two dollar bloc currencies so it is definitely possible for the two to move in opposite directions.

October 16, 1997MCM, Inc.

294 Washington St., Ste. 734, Boston, Massachusetts

Financial Commentary

COMMODITY FUTURES FORECAST WEEKLY REPORT | DEAN WITTER FUTURES COMMENTARY
THE LATEST COMMITMENT OF TRADERS ANALYSIS FOR CURRENCY CONTRACTS
MYERS ON FUTURES | NIKKO MARKET COMMENTS
SCHAEFFER'S RESEARCH REVIEW
FED PRICES SLIDE BACK TO $65
MONEY VERSUS DEBT TWO AGGREGATES DIVERGED
STOCKMARKET CYCLES | WEEKLY OUTLOOK
INTEREST RATE WATCH | THE ALLENDALE ADVISORY REPORT
NIKKO MARKET COMMENTS | THE REAPER

Consensus National Futures and Financial On Line Index

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