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Exchange rate changes and net positions of speculators in the futures market

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Author Info

  • Thomas Klitgaard
  • Laura Weir

Abstract

Traders, strategists, and other participants in the currency markets continuously seek to understand and interpret short-term exchange rate movements. One data set frequently used in those efforts is a weekly report of net futures market positions held by speculators on the Chicago Mercantile Exchange. In this article, the authors pursue a transaction-oriented line of research to track short-term exchange rate moves. They examine the data set for six currencies over a ten-year period and document a strong contemporaneous relationship between weekly changes in speculators' net positions and exchange rates. The authors find that knowing what speculators did over a given week gives one a 75 percent probability of correctly guessing an exchange rate's direction over that week. One explanation for this relationship is that these speculators-acting on their interpretation of public and private information-have some success anticipating how underlying demand will move exchange rates from their prevailing levels in the very short term.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2004)
Issue (Month): May ()
Pages: 17-28

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Handle: RePEc:fip:fednep:y:2004:i:may:p:17-28:n:v.10no.1

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Related research

Keywords: Foreign exchange rates ; Speculation ; Futures;

References

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  1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
  2. Wang, Changyun, 2001. "The behavior and performance of major types of futures traders," MPRA Paper 36426, University Library of Munich, Germany, revised Jul 2002.
  3. Clarida, Richard H. & Sarno, Lucio & Taylor, Mark P. & Valente, Giorgio, 2003. "The out-of-sample success of term structure models as exchange rate predictors: a step beyond," Journal of International Economics, Elsevier, vol. 60(1), pages 61-83, May.
  4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Micro Effects of Macro Announcements: Real-Time Price Discovery in Foreign Exchange," American Economic Review, American Economic Association, vol. 93(1), pages 38-62, March.
  5. Ronald Macdonald & Mark P. Taylor, 1992. "Exchange Rate Economics: A Survey," IMF Staff Papers, Palgrave Macmillan, vol. 39(1), pages 1-57, March.
  6. Robert P. Flood & Mark P. Taylor, 1996. "Exchange Rate Economics: What's Wrong with the Conventional Macro Approach?," NBER Chapters, in: The Microstructure of Foreign Exchange Markets, pages 261-302 National Bureau of Economic Research, Inc.
  7. Carol Osler, 2000. "Support for resistance: technical analysis and intraday exchange rates," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 53-68.
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