Exchange Rate Changes and Net Positions of Speculators in the Futures Market

[...]In this article, we pursue a transaction-oriented line ofresearch to help track short-term exchange rate movements. Byexamining a publicly available data set well known to currencymarket analysts—net positions held by speculators in thefutures market—we are able to document a strong empiricalrelationship between changes in speculators’ net positions andchanges in exchange rates. We find that by knowing whatspeculators on the Chicago Mercantile Exchange did over thecourse of a week, an observer would have a 75 percent chanceof guessing correctly an exchange rate’s direction during thatsame week. We also provide evidence that the connectionbetween net positions and exchange rates is strong and stable:From 1993 to 2003, weekly changes in the net positions ofspeculators can track 30 to 45 percent of exchange ratemovements of the major currencies over the same week. We donot find, however, that the position data can predict theexchange rate changes over the following week.[...]