BLUE LINE = BRLUSD

The range in KC narrowed to 6.8c in light volume as the market was subject to option expiration. Many of the changes of the COT report are as a result of expiration. Nevertheless, the constant pressure that drew the market to the 148.00 area was mostly fund selling which was absorbed by commercial buying. This scenario is one that has been repeated again and again and one that is a supportive factor, eventually leading to higher prices. As we see on the chart, once Q options were no longer a factor, prices rose, fueled by threats of cold weather next week. The question is, will commercial and long selling create a ceiling in spite of the obvious fund reversal to the buy side? We have seen many failed rallies in the last few weeks especially as the market encountered heavy selling in the mid-160.00 level. There is one significant difference developing this time around however.

Spreads suddenly rallied on Thursday and Friday. Of course spreads behave firmly as outright prices rise but on these days they became very strong as market makers and other shorts were forced to cover or hedge the many puts that they bought and calls that they sold in the CSO market , and mostly in ZH. Although UZ moved slightly as it was -2.70c bid for short spell, the ZH and forward spreads rallied sharply. Z1Z2 for example which closed on Tuesday at -6.65c ended on Friday at -5.35c while the K2K3 traded from -4.3c to -3.1c. Of course, origin contributed possibly to the strength in spreads as they sold far forwards. The initiators of the CSO activity were both commercial and spec who possibly expect spreads to behave similarly to the RC market which ended at 11$ premium in UX.

For now the market closed well on Friday but fulfillment for higher prices is in the hands of longs and commercials. It is the middle of July and traders will soon begin thinking of rolling or liquidating the U contract whose OI is substantial. U is also a big month for options which will expire on August 13th. The buyers in the market are of course funds but we should keep in mind the market makers, and others who have sold calls to hopeful traders who have purchased thousands of calls at 200.00c and higher not just in Q but in U and Z:

https://www.theice.com/marketdata/reports/datawarehouse/ConsolidatedEndOfDayReportPDF.shtml

Of course, there is a large option OI in U options on the way up that may provide resistance as well as we approach option expiration.