Journal Article

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

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.

Keywords: Speculation; Futures; Foreign exchange rates;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Economic Policy Review

Publication Date: 2004

Issue: May

Pages: 17-28

Order Number: v.10 no.1